QUAKER FABRIC CORP /DE/ - 10-K Annual Report

Back to GetFilings.com

________________________________________________________________________________

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

-------------------

FORM 10-K

[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

FOR THE FISCAL YEAR ENDED JANUARY 3, 2004

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
-------------------

QUAKER FABRIC CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

-------------------

DELAWARE 04-1933106
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

941 GRINNELL STREET
FALL RIVER, MASSACHUSETTS 02721
(ADDRESS PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (508) 678-1951

-------------------

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Common Stock, par value $.01
(TITLE OF CLASS)

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes: X No:
--- ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes: X No:
--- ---

The aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant, computed by reference to the closing sales
price as quoted on NASDAQ on July 3, 2003 was approximately $106.1 million.

As of March 10, 2004, 16,813,368 shares of Registrant's common stock, par
value $0.01 per share, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

________________________________________________________________________________

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER YARD AMOUNTS)

i

TO OUR SHAREHOLDERS

During 2003, our overall performance was solid, particularly when viewed
against the backdrop of last year's very challenging macroeconomic and
geopolitical environment, and a number of important investments for the future
were put in place. Net sales for the 52-week fiscal year ended January 3, 2004
were $325.3 million, with net income of $7.9 million and diluted earnings per
share of $0.47; compared to net sales of $365.4 million, net income of $11.6
million and diluted earnings per share of $0.69 for the 53-week fiscal year
ended January 4, 2003. A refund related to the favorable resolution of a foreign
tariff dispute added $1.4 million of non-recurring income to the company's
fiscal 2003 pre-tax income, increasing fully diluted EPS for the year by 5
cents.

Quaker's 2003 results, particularly during the fourth quarter, reflect both
improved operational performance and the positive effect of the strategic and
operating initiatives we have been pursuing. Our gross margin performance for
the fourth quarter and the year demonstrated considerable strength, despite
lower revenues, largely as a result of an increase in our operating
efficiencies, careful management of our raw material and other costs and our
continued focus on the fundamentals of our business. Our operating margin,
however, was down 130 basis points for the year, primarily because of the
ongoing costs associated with the strategic investments we have made over the
past few years to build increased capability in the areas of research and
development, product styling and design, market development, information
technology, supply chain management and the training and development of our
workforce -- all of which are intended to build our competitive strength for the
future.

Our commitment to innovation, technology and new product development allowed
Quaker to introduce a number of new fabric products with margins consistent with
our profitability objectives -- including our newest product entries in the
sueded, laminated, washed, microdenier and high-definition design product
categories. We are particularly pleased by the market's reaction to our newest
collections of sueded fabrics, which we believe provide our customers with a
superior product that they can use to ensure that their own product offerings
bring something distinctly different to the market. It is also important to note
that the development and introduction of these very same products provides us
with the vehicle we needed to compete head-on with less expensive imported
goods.

In addition, during 2003, we reduced inventory, paid our first-ever
dividends, improved our cash flows, and paid down debt -- ending the year with a
net debt to total capitalization ratio of 18.9%, versus 28.7%at the end of 2002.
As a result, we further strengthened our balance sheet, positioning us to
continue responding quickly to new challenges and opportunities as they arise.
The company's financial strength also led to a 20%increase in our dividend for
the fourth quarter.

Looking ahead, we will be continuing to focus on the fundamental elements of
our core business strategy -- providing our customers with the most outstanding
combination of products and service available today -- and we are very focused
on rebuilding volume. Quaker continues to offer the industry's best and most
innovative products, and we believe that core strength gives us the necessary
platform to increase our sales as market conditions improve. We are anticipating
excellent placements at this year's April High Point Furniture Market and our
newest product line, which we expect to be well-represented in High Point, has
already met with an enthusiastic reception at all of the other important
industry trade shows that have taken place so far this year, including the
Showtime Fabric Fair in High Point and the San Francisco Furniture Market in
January, and key international trade shows in Frankfurt and Toronto.

Quaker also remains committed to the export market. While export sales for
both the fourth quarter and last year as a whole were down, we are optimistic
for a rebound during 2004 as a result of a number of strategic moves we made
during the latter part of 2003 and earlier this year. These moves included the
opening of a new sales office and fabric showroom in Germany to capitalize on
the potential of the European market and complement the work already being done
there out of our U.K. sales office, the opening of a sales office in Singapore
and the hiring of an experienced international sales agent to represent us in
South Africa.

We continued to strengthen our presence in the contract market during
2003 -- with key progress made, from both a product development and distribution
standpoint -- and we feel that we have the

ii

pieces in place to allow that process to maintain its momentum and to fully
establish Quaker as a key player in that arena.

With respect to our yarn sales business, we have worked hard during the past
year to find new markets for our yarn products and strategically reposition that
segment of our business. As a result of this effort, our fourth quarter yarn
sales demonstrated considerable strength, with sales for the quarter of $3.1
million up 11.6%versus the fourth quarter of 2002. And we expect to benefit
further from our strategic repositioning of this aspect of our business during
the balance of this year.

Our efforts to continue improving our cost structure will also remain a
priority, as will the work we are doing to further improve efficiencies
throughout our manufacturing operations -- all without undermining our
commitments to superior product design, innovation and customer service or
compromising the returns anticipated from the targeted strategic investments we
have made in the development of those competencies over the last few years.

We believe that the investments we have made over the last few years have
positioned Quaker well to continue to be a formidable competitor -- in both the
domestic and international markets -- and to deliver solid returns to our
shareholders over time. In fact, that is our commitment and the essence of our
corporate mission and identity.

We appreciate your interest in the company and your continued support.

Sincerely,

Larry A. Liebenow Sangwoo Ahn

Larry A. Liebenow Sangwoo Ahn
President and Chief Executive Officer Chairman of the Board

iii

PART I

ITEM 1. BUSINESS

OVERVIEW

Quaker Fabric Corporation ('Quaker' or the 'Company') is a leading designer,
manufacturer and worldwide marketer of woven upholstery fabrics primarily for
residential furniture and one of the largest producers of Jacquard upholstery
fabrics in the world. The Company is also a leading developer and manufacturer
of specialty yarns, including a variety of chenille, taslan and spun products,
which Quaker both sells and uses in the production of its fabrics. The Company's
vertically integrated operations provide Quaker with important design, cost and
delivery advantages. The Company's product line is one of the most comprehensive
in the industry and Quaker is well known for its broad range of Jacquard
fabrics, including its soft, velvet-like Jacquard chenilles. The Company's
revenues in 2003 were $325.3 million.

Quaker has been producing upholstery fabric for over fifty-eight years and
is a full-service supplier of Jacquard and plain woven upholstery fabric to the
furniture industry. Quaker's current product line consists of over 5,000
traditional, contemporary, transitional and country fabric patterns intended to
meet the styling and design, color, texture, quality and pricing requirements of
promotional through middle to higher-end furniture manufacturers. Additionally,
the Company introduces over 1,000 new products to the market annually.
Management believes that Jacquard fabrics, with their detailed designs, provide
furniture manufacturers with more product differentiation opportunities than any
other fabric construction on the market.

The Company sells its upholstery fabrics to over 3,000 furniture
manufacturers worldwide, including virtually every significant domestic
manufacturer of upholstered furniture. Quaker also distributes its fabrics
internationally. In 2003, fabric sales outside the United States of $40.6
million represented approximately 12.8%of gross fabric sales.

Quaker uses three tradenames in the marketing of its fabrics -- Whitaker'r',
Quaker'TM' and Davol'TM'. Quaker's Whitaker'r' Collection, a branded line of a
select group of the Company's better-end products, is intended to meet the
design and construction requirements of higher-end furniture manufacturers and
jobbers. In 2001, the Company began marketing certain fabrics intended to meet
the design, construction and pricing needs of its promotional-end customers
under the Company's Davol'TM' brand name. The balance of the Company's fabrics
carry the Quaker'TM' name -- and while there is some price point overlap at the
extreme ends of the Quaker line, most of the fabrics marketed under the Quaker
umbrella are intended to meet the product needs of the Company's high-volume,
middle to higher-end furniture manufacturing customers.

Management estimates that approximately 65% of the Company's fabric sales
are manufactured to customer order.

During the past five years, Quaker has invested $80.6 million in new
manufacturing equipment to expand its yarn and fabric production capacity,
increase productivity, and improve product quality. During 2004, Quaker plans to
spend approximately $14.8 million for new projects consisting principally of new
manufacturing equipment to further its marketing, productivity, quality, service
and financial objectives, and for IT programs.

The Company produces its yarn and fabric products in its ten manufacturing
plants in the greater Fall River, Massachusetts area, where Quaker has nearly
2.0 million square feet of manufacturing and warehousing space. Quaker also
leases warehouse space in Brockton, Massachusetts. In addition to distribution
from the Company's facilities in Fall River, Quaker maintains domestic
distribution centers in High Point, North Carolina, Verona, Mississippi, and
City of Industry, California. To provide better service to its international
customers, the Company also has a distribution center in Mexico and uses a
third-party distribution company to provide warehousing services in Brazil.

The Company's annual reports on Form 10-K, quarterly reports on Form 10-Q,
and all amendments to those reports will be made available free of charge
through the Investor Relations section of the Company's Internet website
(http://www.quakerfabric.com) as soon as practicable after such material is
electronically filed with, or furnished to, the Securities and Exchange
Commission.

1

THE INDUSTRY

Total domestic upholstery fabric sales, exclusive of automotive
applications, are estimated to be in excess of $2.5 billion annually. Management
estimates international fabric sales to be at least twice those of the domestic
market. Due to the capital intensive nature of the fabric manufacturing process
and the importance of economies of scale in the industry, the top 14 upholstery
fabric manufacturers, including Quaker, account for over 80%of the total
domestic sales. Management believes that Quaker is currently the only large U.S.
fabric producer that is continuing to demonstrate its long-term commitment to
the international market by focusing on expanding its export sales.

Within the Jacquard segment, price is a more important competitive factor in
the sale of promotional products than it is in middle to better-end lines, where
fabric styling and design considerations typically play a more important role.

Demand for upholstery fabric is a function of demand for upholstered
furniture. The upholstered furniture market grew from $5.4 billion in 1991 to an
estimated $10.9 billion in 2003. Total upholstered furniture demand is cyclical
and is affected by population growth and demographics, new household formations,
consumer confidence, disposable income, geographic mobility, housing starts, and
home sales.

The upholstery fabric covering a sofa, chair, or other piece of furniture is
one of the most significant factors influencing a furniture buyer's selection.
Purchase decisions are based primarily on the consumer's evaluation of
aesthetics, comfort, durability, quality and price. As a result, the fabric
decisions a furniture manufacturer makes play a critical role in its ability to
gain a product differentiation advantage at the retail level.

Management believes the long-term outlook for the Company's upholstery
fabric sales will be influenced by the following factors:

(i) The furniture industry has been consolidating at both the retail and
manufacturing levels for several years. As a result, fabric suppliers
are required to deal with larger customers that require a broader
range of product choices, shorter delivery lead times,
customer-specific inventory management programs, and additional
information technology-based support services.

(ii) The United States has shifted toward a more casual lifestyle, as
evidenced by product shifts in the apparel and home furnishings
industries. Management believes this has resulted in growing demand
for less formal furniture upholstered with softer, more comfortable
fabric.

(iii) Consumer tastes in upholstered furniture coverings change as new
trends and styles emerge. Leather as a furniture covering has
increased in popularity in recent years, resulting in a reduction in
overall sales of woven upholstery fabric.

(iv) Pushed by consumers demanding immediate product delivery, the
furniture industry has increased its focus on just-in-time
manufacturing methods and shorter delivery lead times.

(v) Advances in the use and application of information technology
throughout the industry supply chain can be anticipated to allow
furniture industry manufacturers, suppliers and customers to share
information more quickly and more effectively, resulting in reduced
cycle times and greater transparency for end consumers who will be
able to determine the status of their orders at each stage of the
manufacturing process. Significant advances in the use of information
technology in the sales and marketing function are also anticipated.

(vi) Both consumers and furniture manufacturers have placed increased
emphasis on product quality, enabling fabric manufacturers with
effective quality control systems to gain a competitive advantage.

(vii) While demand levels over the near term may be adversely affected by
weakness in both the domestic and global economies, a move by the
baby boom generation toward more upscale furniture as they approach
retirement age and additional demand generated by that same group's
purchases of vacation and retirement homes can be expected to provide
favorable longer term demand trends.

2

(viii) While at one time most of the largest U.S. fabric producers had
leveraged their size and broad product lines to expand their export
sales, management believes that Quaker alone continues to focus on
international sales as a major strategic initiative.

(ix) In recent years, the lines between the furniture industry's
manufacturers and retailers has begun to blur, with several of the
nation's larger furniture manufacturers opening retail outlets of
their own.

(x) Fabrics entering the United States from China and other low labor cost
countries are resulting in increased price competition in the
promotional and middle ranges of the upholstery fabric and upholstered
furniture markets. In addition, competition in the U.S. domestic market
is likely to further intensify following the January 1, 2005 expiration
of the quotas imposed under the Uruguay Round Agreement on Textiles and
Clothing on textile and apparel products coming into the U.S.

STRATEGY

Quaker's strategy to further its growth and financial performance objectives
includes:

Taking Domestic Market Share. The Company has positioned itself as a
full-service supplier of Jacquard and plain woven fabrics to the promotional
and middle to better end of the market by offering a wide variety of fabric
patterns at prices ranging from $2.40 to $35.00 per yard and by emphasizing
superior customer service.

Expanding International Sales. The Company has made worldwide
distribution of its upholstery fabrics a key component of its strategy.
Quaker has built an international sales and distribution network, dedicated
significant corporate resources to the development of fabrics to meet the
specific styling and design needs of its international customers, and put
programs in place to simplify the purchase of product from Quaker, including
the operation of a distribution facility in Mexico, and the utilization of
the services of a third party distribution company in Brazil. The Company's
international gross sales were $40.6 million in 2003.

Penetrating Related Fabric Segments. Management believes the Company's
styling and design expertise, as well as its ISO 9001-certified operations,
provide opportunities to penetrate the contract and decorative
top-of-the-bed segments, as well as increase Quaker's share of the interior
decorator and recreational vehicle segments. Management believes Quaker's
Ankyra'TM' chenille yarns and fabric finishing abilities will provide the
Company with a product advantage in these segments. As part of these
efforts, during 2002 the Company purchased 24 'double-wide' looms to support
its entry into these segments. During 2003, the Company entered into a
non-exclusive licensing agreement with Hi-Tex, Inc. for the use of its
patented Crypton'r' finish for certain of the Company's contract fabrics.

Maintaining Specialty Yarn Sales. Quaker is a leading producer of
specialty yarns, including chenille, taslan, and spun products.
Approximately 90%of the chenille yarn manufactured by the Company is used in
the production of the Company's fabric. The balance is sold to craft yarn
distributors, upholstery weavers and home fashion accessories firms through
Quaker's yarn sales division, Nortex Yarns. Gross sales of the Company's
specialty yarns were $10.8 million in 2003. The Company's current line of
specialty yarns includes over 50 different varieties of spun and chenille
yarns, and Quaker's yarn design and development staff regularly creates
innovative new specialty yarns for use in the Company's fabrics and sale to
the Company's yarn customers.

Pursuing Strategic Acquisition Opportunities. Although all of Quaker's
growth to date has been the result of internal initiatives, the Company has
evaluated a number of acquisition candidates in the past and plans to pursue
appropriate acquisition opportunities in the future. An ideal acquisition
candidate would either support the Company's new market development
objectives; enhance its international position; permit additional
investments in marketing, new product research and development, design,
information technology and manufacturing; improve Quaker's financial
performance by increasing efficiency and absorption of overhead; or offer a
unique and complementary product, manufacturing or technical capability.

3

COMPETITIVE STRENGTHS

Management believes that the following competitive strengths distinguish
Quaker from its competitors and that these strengths serve as a solid foundation
for the Company's long-term growth strategy:

Product Design, Development and Technological Innovation Capabilities.
Management believes that Quaker's reputation for design excellence, product
leadership and technological development is, and will continue to be, the
Company's most important competitive strength.

Financial Strength. With a strong financial position, including a low
debt to total capital ratio, the Company has the ability to support research
and development and targeted capital investment initiatives, and to continue
responding quickly to new opportunities and challenges as they arise.

Commitment to Customer Service. The Company is committed to offering its
customers the best overall service levels in the industry. Management
believes Quaker's current delivery lead times continue to be among the best
in the industry.

Broad Product Offering. The breadth and depth of Quaker's product line
enables the Company to be a full-service supplier of Jacquard and plain
woven fabrics to virtually every significant domestic manufacturer of
upholstered furniture.

Technological Expertise. Quaker is driven by innovation and is committed
to exploring the development and use of new technology to meet its product
development, customer service, operating and financial objectives.

State-of-the-Art Manufacturing Equipment. Management believes the
Company has one of the most modern, efficient and technologically advanced
manufacturing bases in the industry.

Focus on Jacquard Fabrics. Management believes the detailed, copyrighted
designs of the Company's Jacquard fabrics have enabled it to compete
primarily on the basis of superior styling and design, rather than price.

Vertical Integration. Using Quaker's own specialty yarns in the
production of its fabrics provides the Company with significant design, cost
and delivery advantages.

PRODUCTS

The Company offers a broad assortment of contemporary, traditional,
transitional and country fabrics to manufacturers of both promotional-end and
middle to better-end furniture at prices ranging from $2.40 to $35.00 per yard.
While most of the Company's fabrics have historically been sold under the Quaker
label, the Company began marketing a select group of its middle to better-end
fabrics under its Whitaker'r' label in October 1996. During 2001, the Company
began marketing certain of its fabrics to its promotional-end customers under
its Davol'TM' brand name. In 2003, the Company's promotional-end fabric line and
its middle to better-end fabric line had average gross sales prices of $4.08 per
yard and $6.63 per yard, respectively, compared to $4.00 and $6.43,
respectively, in 2002. The weighted average gross sales price per yard of the
Company's fabrics was $5.66 in 2003, compared to $5.57 in 2002.

Quaker's product line is focused on fabrics with woven designs referred to
in the industry as 'Jacquards,' because of the special Jacquard equipment, or
heads, required to produce them, and also includes a broad assortment of
striped, plaid, and plain fabrics. The vast majority of Quaker's looms are
equipped with Jacquard heads. The use of these heads makes it possible to vary
the pattern, color, and texture of both the filling and warp yarns in a fabric.
While fabrics manufactured on looms without Jacquard heads have a much more
limited range of possible designs, Quaker added thirty-six Dobby looms to its
manufacturing base during 2001 to reduce the cost of manufacturing certain
fabrics that do not require the use of Jacquard heads. During 2002, Quaker added
24 'double-wide' Jacquard looms to support the Company's entry into the
decorative home fashions segment.

Management believes that the Company's newest collections of sueded fabrics
provide Quaker's customers with a superior product that they can use to advance
their efforts to ensure that their own product offerings bring something
distinctive to the market. Management also believes that the

4

development and introduction of these products allows the Company to compete
head-on with less expensive imported goods.

Quaker's product offerings are noted for their use of chenille and other
specialty yarns, which give the fabric a soft, velvet-like appearance and feel.
To take advantage of the trend toward casually styled furniture, and to
capitalize on the growth of the motion furniture segment, Quaker developed a
soft chenille yarn with superior abrasion resistance to compete effectively with
flocks, velvets and tufted fabrics. The Company markets the line of chenille
fabrics it produces using these yarns under its Ankyra'TM' label. Through a
licensing agreement with Solutia (f/k/a Monsanto), a number of the Company's
Ankyra'TM'-based chenille fabrics, as well as certain other fabrics in its line,
have been 'Wear-Dated' by Solutia. Management anticipates that chenille will
remain an important element in the Company's fabric designs and that it will
continue to influence -- and be enhanced by -- Quaker's on-going development and
use of additional new specialty yarns and manufacturing techniques and
processes. In addition, the Company has recently developed a collection of spun
yarn products, including several distinctive boucles that Quaker's design staff
is using to further the Company's styling and design objectives.

Quaker's broad product line enhances the ability of the Company's customers
to meet most of their fabric needs through one full-service supplier while, at
the same time, allowing them to purchase fabrics in a wide enough range of
designs to enable them to differentiate their own new lines of upholstered
furniture from those of their competitors. To generate additional business from
manufacturers of higher-end upholstered furniture, the Company offers a select
group of its middle to better-end products under its Whitaker'r' label, and in
2001 the Company began marketing certain of its promotional-end products under
its Davol'TM' brand name. Gross sales of the Company's middle to better-end
fabrics were $231.1 million, or 72.7%of total gross fabric sales in 2003, with
approximately 42.1%of those sales made under the Whitaker'r' label.

NEW PRODUCT DEVELOPMENT AND DESIGN

Although management believes fashion trends in the upholstery industry do
not change significantly from year to year, consumer tastes in upholstery fabric
and other furniture coverings do change over time. Therefore, it is important to
identify emerging fashion needs and to develop new products responsive to those
needs. Management believes Quaker's design staff has an established reputation
for design excellence and product leadership.

The Company's design department has overall responsibility for the
development of new upholstery fabric patterns for sale by the Company. Although
the Company purchases artwork from independent artists, the Company's staff of
professional designers and designer technicians creates the majority of the
designs on which the Company's fabric patterns are based and also determines the
construction of those patterns. The design department uses state-of-the-art
Computer Aided Design ('CAD') equipment to reduce the length of the Company's
new product development cycle.

The development of each new fabric line requires six months. The first step
in the new product development process is the preparation of a merchandising
plan for the line. The Company's merchandising plans are based on extensive
input from Quaker's sales representatives, senior managers, and major customers
and provide both a broad outline of the number of new products to be included
within each major styling category (e.g., contemporary, traditional,
transitional, and country), as well as the number of new products to be created
for sale at each of the major price points within those styling categories.
Beginning in 2002, the Company enhanced its merchandising practices by including
a number of fabric collections reflecting a common theme in each new line.

In addition, because of the design, cost, and delivery advantages of
Quaker's vertically integrated manufacturing operations, substantial emphasis is
placed on making maximum use of the Company's internally produced yarns during
the fabric development process. In conjuction with development of each new
fabric merchandising plan, members of the Company's fabric design and yarn
development staffs meet to identify the design staff's yarn requirements for the
Company's next fabric line and many of Quaker's proprietary yarns trace their
origins to this design-driven process. Quaker's product development, engineering
and manufacturing staffs also play a key role in the new product development

5

process by reviewing proposed new product constructions to evaluate their impact
on the Company's raw material costs, equipment utilization rates and quality
performance. The Company's product development and engineering staffs also
design and develop new product attributes that add value to Quaker's products
from the consumer's perspective, and their efforts have lead to initiatives such
as the Company's entry into a non-exclusive agreement with Hi-Tex, Inc. for the
use of its patented Crypton'r' finish for certain of the Company's fabrics for
the contract segment.

Although a few plain, striped and plaid fabrics remain in the Company's
product line for ten years or more, a successful product typically has a life of
two to three years. Quaker's design staff also regularly creates custom patterns
for customers seeking to differentiate their products for distribution purposes,
hit a certain price point at the retail level, or meet a particular styling need
in the market they serve. These patterns, which are not part of Quaker's 'open
line,' are known in the industry as 'Specials.'

SALES AND MARKETING

UPHOLSTERY FABRICS

Net fabric sales during 2003 were $314.7 million, or approximately 96.7% of
the Company's net sales. The Company sells its upholstery fabrics to over 3,000
furniture manufacturers worldwide, including substantially all of the largest
domestic manufacturers of upholstered furniture. Fabric sales to the Company's
top 25 customers accounted for approximately 46% of 2003 net sales. None of the
Company's customers accounted for more than 7.9% of net sales during 2003.

The Company uses a direct marketing force of 25 sales representatives, five
of whom are based in Mexico, to market its fabrics in the United States, Canada
and Mexico. All such sales representatives are paid on a commission basis and
represent the Company exclusively. Quaker's fabrics are distributed
internationally through a network of eleven exclusive sales representatives,
working out of sales offices and showrooms in the United Kingdom, the United
Arab Emirates, India, Singapore, and Germany, and four exclusive sales agents in
Brazil, where Quaker maintains a showroom and sales office in Sao Paulo. In
addition, Quaker has appointed 10 independent commissioned sales agents to
represent the Company in the Far East, Australia, New Zealand, the Middle East,
Central and South America, Africa and Asia. All agents located outside the
United States are supervised by Quaker's Vice President -- Sales.

Quaker's United States customers market their products through two annual
national furniture industry trade shows held in April and October in High Point,
North Carolina, as well as through various regional shows. These shows provide
most of Quaker's customers with the opportunity to introduce their new furniture
lines to their major retail customers in a single setting. Quaker's design and
marketing process is closely linked to these trade shows. The Company develops
two major lines for introduction to the Company's customers at the Showtime
Fabric Fairs held in High Point in January and July of each year. Almost all
major U.S. furniture manufacturers attend Showtime to begin selecting fabric for
the new lines of sofas and other upholstered furniture products that they will
exhibit at the April and October High Point Furniture Markets.

Quaker also markets its fabrics at a number of trade shows regularly
attended by its export customers, including shows in Belgium, Dubai, Germany,
Italy, Brazil and Mexico, as well as certain trade shows in the United States
aimed at the international market. Foreign sales of fabric accounted for
approximately 12.8%of Quaker's gross fabric sales during 2003.

In addition to distribution from the Company's facilities in Fall River,
Massachusetts, Quaker maintains five distribution centers from which its
customers may take immediate delivery of selected products. These facilities are
located in City of Industry, California; Verona, Mississippi; High Point, North
Carolina; Sao Paulo, Brazil; and Mexico City, Mexico.

SPECIALTY YARNS

Net yarn sales during 2003 were $10.6 million, or approximately 3.3%of the
Company's net sales. The Company designs, manufactures and markets several types
of specialty yarns, including fancy spun, fancy twisted and chenille. Because of
their soft, velvet-like feel, chenille yarns, and fabrics made out of

6

chenille yarns, are responsive to consumer demand for softer, more casual home
furnishings and accessories. The Company's specialty yarns are sold under the
name of Nortex Yarns to craft yarn distributors and manufacturers of home
furnishings products, principally weavers of upholstery fabric, throws, afghans
and other products. The Company has approximately 45 yarn customers.

Management believes the technical expertise of Quaker's yarn development
staff provides the Company with an important competitive advantage by enabling
Quaker to create and market innovative specialty yarns to meet its customers'
styling and performance criteria. Historically, chenille yarns have had
difficulty meeting the durability standards required for use in fabrics which
are likely to be subjected to heavy wear. To address this problem, Quaker's yarn
development staff created a finished chenille yarn with superior abrasion
resistance, and in 1997 the United States Patent and Trademark Office issued a
patent to protect the Company's Ankyra'TM' process.

MANUFACTURING

The Company operates ten manufacturing facilities in the greater Fall River,
Massachusetts area, and management estimates that approximately 65%of the
Company's fabric sales are manufactured to customer order. Management, in
partnership with key customers, is utilizing forecasting techniques to
significantly reduce delivery lead times. The Company's objective is to operate
its production facilities on a three-shift, five to five and one half-day week
schedule. However, during periods of heaviest demand, Quaker operates some or
all of its production areas on seven-day, three-shift schedules and/or
outsources a portion of its production requirements. During periods of weaker
demand, the Company will decrease its production rates accordingly.

The Company's vertically integrated manufacturing process begins with the
production of specialty yarns, primarily for use in the production of the
Company's fabrics, but also for sale to manufacturers of craft yarns, home
furnishings products and apparel. Although the Company purchases all of its
commodity yarns, most of the Company's weft, or filling, yarn needs are met
through internal production. The next stage of the fabric manufacturing process
involves the preparation of beams of warp yarn. The beams are then sent to the
Company's weave rooms, where looms are used to weave the warp and filling yarns
together. The final steps in the fabric production process include routing the
fabric through various fabric finishing processes to enhance the durability and
performance characteristics of the end product, as well as a stain-resistant
finish upon customer request. Some of the Company's fabrics, including its
Quaker Plush'r', Quaker Suede'TM', Quaker Silk'TM' and Quaker Ultra'TM'
products, and the products it markets under the Crypton'r' brand as a result of
its licensing agreement with Hi-Tex, Inc., benefit from additional chemical and
mechanical finishing processes designed to enhance their appearance, texture or
'hand' and/or performance characteristics. A final product quality inspection is
conducted prior to shipment to the Company's customers.

Since 1988, the United Kingdom has had a flammability standard in place
applicable to all upholstery fabrics sold in the U.K., including products
imported into the U.K. market from other countries. To ensure compliance with
this regulatory standard, the Company devoted considerable resources to the
successful development of fabrics which would meet the performance
specifications set forth in the standard. For the past several years, the United
States Consumer Product Safety Commission has been working on the development of
a similar upholstered furniture flammability standard, and the Company has
played a lead role in the shaping of these proposed regulations. Management
believes the adoption by the CPSC of new regulations in this area, if that were
to occur, would not likely have a material adverse effect on the Company's
results of operations or financial condition and that, prior to the effective
date of such regulations, if any, the Company would be able to make such changes
in its fabric designs and manufacturing processes as would be required to ensure
the Company's compliance.

Quaker has added approximately 400 new looms to its manufacturing base since
1989. The vast majority of the Company's looms are equipped with Jacquard heads,
maximizing the Company's ability to design its products to meet customer needs,
without equipment-related design constraints. During 2000, the mechanical
Jacquard heads on approximately 80 of the Company's older looms were replaced
with electronic Jacquard heads to improve productivity, and another 26
mechanical heads were replaced with electronic heads during 2002. During 2001,
the Company added 36 Dobby looms to reduce the cost

7

of manufacturing certain fabrics not requiring the use of Jacquard heads, and in
2002, 24 'double-wide' Jacquard looms were moved into production to support the
Company's entry into the decorative home fashions segment and add additional
manufacturing capacity.

The Company's fabrics are generally shipped directly to its customers on an
FOB Fall River or FOB warehouse basis. The Company also supplies its
distribution centers with an appropriate selection of fabrics for customers
needing immediate delivery.

During the past five years, the Company placed in service more than $80.6
million of new manufacturing equipment to increase capacity, improve
manufacturing efficiencies, and support the Company's marketing, quality and
delivery objectives.

QUALITY ASSURANCE

Management believes that product quality is a significant competitive factor
in both the domestic and international fabric markets. Quaker's quality
initiatives include:

The use of incentive programs in certain of its production departments to
factor quality into the overall compensation programs in these areas.

Inspection of incoming raw materials to ensure they meet the Company's
product specifications and to provide prompt feedback to vendors when
defects are discovered so that corrective actions may be undertaken
immediately.

A final quality inspection of the Company's yarn and fabric products before
they are released for shipment.

Continuous monitoring of the Company's performance against industry
standards and its own internal quality standards.

ISO 9001 certification of all of the Company's operations. During 2001, the
Company received certification to the new ISO 9000: 2000 Quality Standard
for ISO 9001.

In addition to these measures, the built-in quality control features and
more precise settings on the Company's newer production equipment also support
the Company's efforts to provide defect-free products to its customers.

The Company's quality-related return rate, as a percentage of total yards
shipped, was 0.3% in 2003 and 0.5% in 2002, and the Company's sales of
second-quality fabric were $1.5 million in 2003 and $1.9 million in 2002.

TECHNOLOGY

As part of Quaker's overall strategy to improve productivity and meet its
customers' total service requirments, the Company strives to introduce new
technologies into its operations whenever possible. Quaker's efforts in this
area include: (i) the use of its management information system to provide
computer support to the Company's manufacturing operations; (ii) the use of CAD
equipment to reduce the time required to bring its new products to market,
including the design of 'Specials'; (iii) the use of bar-coding systems for
inventory control purposes and to improve both the efficiency of its own
manufacturing operations and service to its customers; (iv) the use of
electronic Jacquard heads and other production equipment equipped with
microprocessors to improve manufacturing efficiencies and reduce unit costs; (v)
the use of a heuristic advanced planning system to both support Quaker's
delivery lead time objectives and improve productivity levels in Quaker's
manufacturing areas; and (vi) the use of real-time process monitoring control
systems to identify opportunities to improve manufacturing efficiencies.

The Company's CAD equipment is used to develop new fabric designs and to
prepare plastic Jacquard cards for use with the Company's mechanical Jacquard
heads, and computer disks for use with Quaker's electronic Jacquard heads. These
plastic cards and computer disks contain precise instructions about the
construction of the particular fabric pattern to be woven. During 2001, the
Company installed new CAD software, providing all of Quaker's design
professionals with enhanced automated design support directly on their
individual desktop computers.

8

SOURCES AND AVAILABILITY OF RAW MATERIALS

Quaker's raw materials consist principally of polypropylene, polyester,
acrylic, cotton and rayon fibers and yarns for use in its yarn manufacturing and
fabric weaving operations, and latex to backcoat its finished fabrics. In
addition, Quaker purchases commission dyeing services from various dyehouses
which dye, to the Company's specifications, certain fabrics produced by the
Company and certain of the yarns the Company produces internally or purchases
from other manufacturers. Substantially all of the raw materials used by the
Company are purchased from primary producers with manufacturing operations in
the United States, however, certain of the Company's raw material requirements
are purchased from non-U.S. based suppliers. The Company is dependent upon
outside suppliers for its raw material needs, including dyeing services, and is
subject to price increases and delays in receiving these materials and services.
The Company's raw materials are predominantly petrochemical products and their
prices may fluctuate with changes in the underlying market for petrochemicals in
general. In addition, the financial performance and/or condition of some textile
industry suppliers has been hurt by reduced overall demand, increasing the risk
of business failures and/or further consolidations among the Company's supplier
population and the related risk of disruption to Quaker's operations.

Although other sources may be available, the Company currently procures
approximately 59% of its raw material components from two major industry
suppliers, one of which is the sole supplier of a filament yarn used in the
Company's chenille and Taslan air texturizing manufacturing operations.
Generally, Quaker has not experienced any significant difficulty in meeting its
raw material needs, expects that it will be able to obtain adequate amounts to
meet future requirements, and as a matter of corporate policy, attempts to
identify alternate sources for all critical raw material components.

On December 17, 2003, Solutia, Inc., the Company's supplier of acrylic
fiber, filed for reorganization under Chapter 11 of the federal bankruptcy laws.
Approximately 35% of the Company's filling yarns are acrylic and are purchased
from spinners that use fiber from Solutia. While the actions taken by Solutia
have not had an adverse effect on supplies to Quaker, the Company has identified
alternate suppliers and products and is putting in place arrangements to reduce
the risk of price increases or interruptions in raw material flows stemming from
the Solutia bankruptcy filing. In addition, the Company currently purchases
essentially all of its polypropylene yarn, a component used in approximately 60%
of the Company's fabrics, from one domestic supplier. While the Company has
previously evaluated various approaches to dealing with an interruption in its
supply of polypropylene from this supplier, including a hybrid approach
involving the use of both alternate suppliers and an adjustment in the fiber
content and other product specifications of certain fabrics, the Company is
developing, but currently does not have, a firm alternate program in place to
mitigate the risks associated with an interruption in its supply of
polypropylene arising out of an operating, financial or other problem at this
supplier. Further, the Company sources a low melt polymer essential to the
production of Quaker's Ankyra'TM' chenille yarns from a single supplier. While
an alternate source of this polymer is available, it is unlikely that this
source would have the manufacturing capacity to meet all the Company's
requirements for this raw material, at least initially. A shortage or
interruption in the supply of any critical component could have a material
adverse effect on the Company.

The Company's production operations are heavily reliant upon a consistent
supply of energy, including electricity to power the Company's manufacturing
equipment, natural gas to generate the heat used in Quaker's finishing
operations and oil to heat the Company's office areas. A significant shortage or
interruption in the availability of these energy sources would likely have a
material adverse effect on the Company's operations and financial performance.
Beginning in the latter part of 2000, the Company began to experience rising
energy costs. To help provide the Company with greater stability and to reduce
the impact of rising energy costs, during 2001, Quaker entered into a contract
to purchase its electrical power requirements at a fixed price through December
2004.

COMPETITION

The markets for the Company's products are highly competitive. Competitive
factors in the upholstery fabric business include product design, styling,
price, customer service and quality. Price is a more important competitive
factor in the promotional-end of the market than it is in the middle to
better-end of the market, where competition is weighted more heavily toward
fabric styling and design

9

considerations. Cost and other factors may make imported fabrics more
competitive with the Company's products in the future. Recent improvements in
service levels and product design have enhanced the competitive position of
imported products, particularly those coming into the United States from China.
In addition, competition in the U.S. domestic market is likely to further
intensify following the January 1, 2005 expiration of the quotas imposed under
the Uruguay Round Agreement on Textiles and Clothing on textile and apparel
products coming into the U.S. During 2003, the Company's yarn sales business
continued to be adversely affected by diminished demand for products
manufactured by the Company's customers in the home furnishings and apparel
markets. The Company's sales to craft yarn distributors, however, grew somewhat
during 2003, and the Company anticipates additional sales growth in that segment
during 2004.

Several of the companies with which the Company competes may have greater
financial resources than the Company. The Company's products compete with other
upholstery fabrics and furniture coverings, including prints, flocks, tufts,
velvets, suede and leather, with leather furniture enjoying growing popularity
over the past few years, to some extent at the expense of woven fabrics, such as
the Jacquards and other woven fabrics Quaker manufactures.

BACKLOG

As of January 3, 2004, the Company had orders pending for approximately
$26.5 million of fabric and yarn compared to $26.1 million as of January 4,
2003. The Company's backlog position at any given time may not be indicative of
the Company's long-term performance.

TRADEMARKS, PATENTS, COPYRIGHTS

The Company seeks copyright protection for all new fabric designs it
creates, and management believes that the copyrights owned by the Company serve
as a deterrent to those industry participants which might otherwise seek to
replicate the Company's unique fabric designs. In June 1995, the Company
introduced a new collection of fabrics featuring Quaker's proprietary Ankyra'TM'
chenille yarns. In 1997, the United States Patent and Trademark Office issued a
patent to the Company protecting the proprietary manufacturing process developed
by Quaker to produce these yarns. The Company's Whitaker mark, as well as a logo
form of the 'W' mark, is registered with the U.S. Patent and Trademark Office.
During 2000, the Company's Quaker Plush mark also became registered with the
U.S. Patent and Trademark Office. The Company has applications pending, with the
U.S. Patent and Trademark Office to register its Davol mark and its Quaker Ultra
mark. In addition, the Company has filed patent applications with the U.S.
Patent and Trademark Office to protect its intellectual property rights in
several new technologies and processes created by the Company's product
development staff, including certain laminated textured products, Quaker's
Regal'TM' chenilles, a continuous washing and post finishing process, and for
the Company's high-value laminated fabrics. During 2003, the Company also
entered into a non-exclusive licensing agreement with Hi-Tex, Inc. for the use
of its patented Crypton'r' finish for certain of the Company's fabrics for the
contract market.

INSURANCE

The Company maintains general liability and property insurance. The costs of
insurance coverage vary generally and the availability of certain coverages can
change. Following the events of September 11, 2001, the Company experienced
significant increases in the premium rates on certain of its insurance coverages
and certain changes were made in the insurance carriers used by the Company and
in the terms and conditions of some of the Company's insurance policies. While
the Company believes that its present insurance coverage is adequate for its
current operations, there can be no assurance that the coverage is sufficient
for all future claims or will continue to be available in adequate amounts or at
reasonable rates.

EMPLOYEES

The Company is the largest manufacturer, and the largest private sector
employer, in Fall River, Massachusetts. As of January 3, 2004, Quaker employed
2,715 persons, including 2,191 production

10

employees, 180 technical and clerical employees, and 344 exempt employees and
commissioned sales representatives. The Company's employees are not represented
by a labor union, and management believes that employee relations are good. The
Company's operations are heavily dependent on the availability of labor in the
Fall River, Massachusetts area.

ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT (See Item 10 herein)

The executive officers of the Company are as follows:

Larry A. Liebenow. Mr. Liebenow has served as President, Chief Executive
Officer, and a Director of the Company since September 1989. From July 1983
until September 1989, Mr. Liebenow was Chairman of the Board and President of
Nortex International, Inc. ('Nortex International'). From September 1971 to July
1983, Mr. Liebenow served as the Chief Operating Officer of Grupo Pliana, S.A.,
a Mexican yarn and upholstery fabric manufacturing concern.

James A. Dulude. Mr. Dulude has been employed by the Company since May 1986
and has served as Vice President -- Manufacturing since August 1995. Mr. Dulude
served as Vice President -- Purchasing, Planning and MIS from November 1990 to
August 1995. Mr. Dulude served as the Company's Director of Purchasing and
Planning from May 1989 to November 1990, Director of Planning and Scheduling
from July 1988 to May 1989, and Director of Information Systems from May 1986 to
July 1988.

Cynthia L. Gordan. Ms. Gordan has been employed by the Company since March
1988 and has served as Vice President, Secretary, and General Counsel of the
Company since March 1989. Ms. Gordan is also responsible for the Company's Risk
Management, Investor Relations and Human Resources functions. From April 1986 to
November 1987, Ms. Gordan served as a Senior Associate in the Corporate
Department of the Chicago law firm of Katten Muchin & Zavis. From November 1981
to April 1986, Ms. Gordan was employed by The General Electric Company where she
served first as the Vice President and General Counsel of General Electric's
life, property, and casualty insurance affiliates in Providence, Rhode Island,
and later as the strategic planner and acquisition specialist for a division of
General Electric Capital Corporation.

Mark R. Hellwig. Mr. Hellwig has served as Vice President -- Supply Chain
Management since October 1998. From January 1996 until October 1998, Mr. Hellwig
was Director -- Supply Chain Management for Solo Cup Company. From August 1993
to January 1996, Mr. Hellwig was Director -- Logistics at Solo Cup Company. From
1989 to 1993, Mr. Hellwig was with Deloitte and Touche LLP.

Paul J. Kelly. Mr. Kelly has served as Vice President -- Finance, Chief
Financial Officer and Treasurer of the Company since December 1989, and since
November 1993 has also had responsibility for working with industry and
institutional analysts. From January 1988 to December 1989, Mr. Kelly was the
co-founder and President of International Business Brokers and Consultants Ltd.,
a business broker and consulting firm. From December 1977 to December 1987, Mr.
Kelly served as Chief Financial Officer of Ferranti Ocean Research Equipment,
Inc., an international manufacturing concern. From February 1973 to December
1977, he was a certified public accountant with Arthur Andersen & Co.

11

Thomas H. Muzekari. Mr. Muzekari has served as Vice President -- Sales since
March 2003, and was Vice President -- Sales and Marketing from October 1998
until March 2003, and Vice President -- Marketing from March 1996 until October
1998. From September 1989 until February 1996, Mr. Muzekari was the Vice
President -- Marketing for Collins & Aikman's Velvet Division. From 1970 to
September 1989, Mr. Muzekari held various management positions in both sales and
marketing with Milliken and Company.

M. Beatrice Spires. Ms. Spires has been employed by the Company since
September 1995 and has served as Vice President -- Design and Merchandising
since March 2003, and was Vice President -- Styling and Design from March 1996
until March 2003. From September 1995 to March 1996, Ms. Spires served as
Quaker's Director of Design. From July 1992 to September 1995, Ms. Spires was
Vice President -- Merchandising for Collins & Aikman's Velvet Division. From
September 1991 to July 1992, Ms. Spires was Merchandising Manager at Collins &
Aikman.

Norman J. Sturdevant. Mr. Sturdevant has served as Vice President -- Chief
Information Officer since August 2001. From August 1999 to April 2001, Mr.
Sturdevant served as Vice President of Information Technology for Bausch &
Lomb's Europe, Middle East and Africa Region. Prior to that, Mr. Sturdevant
served in various director and manager-level information technology positions
with Bausch & Lomb, Entex Information Services and Electronic Data Systems. Mr.
Sturdevant served as an officer in the U.S. Navy from 1978 to 1984.

Duncan Whitehead. Mr. Whitehead has served as Vice President -- Technology
and Development, and Yarn Sales since August 1995. Mr. Whitehead served as Vice
President -- Yarn Sales and Development from May 1990 to August 1995. From
September 1989 to May 1990, Mr. Whitehead was the Vice President -- Sales and
Marketing for the Company's Nortex Division. From July 1983 to September 1989,
Mr. Whitehead served as Vice President of Sales and Marketing for Nortex
International.

The Company's President, Secretary, and Treasurer are elected annually by
the Board at its first meeting following the annual meeting of stockholders. All
other executive officers hold office until their successors are chosen and
qualified.

12

ITEM 2. PROPERTIES

PROPERTIES

Quaker is headquartered in Fall River, Massachusetts where it currently has
ten facilities, nine of which are used primarily for manufacturing and
warehousing purposes. The tenth facility houses the Company's executive,
administrative and design areas as well as certain manufacturing operations. In
addition, the Company maintains a manufacturing facility in Somerset,
Massachusetts and warehouse space in Brockton, Massachusetts. The Company has
three distribution centers in the United States and one in Mexico. We believe
our facilities are in good condition and are suitable and adequate for our
current and future uses. If we are unable to renew any of the leases that are
due to expire in 2004 and 2005, we believe that suitable replacement properties
are available on commercially reasonable terms. The table below sets forth
certain information relating to the Company's current facilities:

- ---------
(1) Lease expires December 31, 2005
(2) Lease expires July 31, 2007
(3) Lease expires March 29, 2004
(4) Lease expires June 30, 2005
(5) Lease expires May 31, 2004
(6) Lease expires September 30, 2006
(7) Lease expires February 28, 2006
(8) Lease expires July 31, 2004

During 2000, the Company also started to maintain inventory at a third party
warehouse provider in Sao Paulo, Brazil. Quaker has sales offices in Fall River,
Massachusetts; Guadalajara and Mexico City, Mexico; Sharjah, United Arab
Emirates; Hickory and High Point, North Carolina; Chicago, Illinois; Tupelo,
Mississippi; City of Industry, California; and Sao Paulo, Brazil. All of the
Company's sales offices, except the one in Fall River, Massachusetts, are
leased. In addition Quaker has five exclusive sales representatives who lease
and maintain sales offices in Germany, India, Johannesburg, London and
Singapore.

The Company also owns approximately 60 acres of undeveloped land in Fall
River to allow for expansion of its operations.

13

ENVIRONMENTAL MATTERS

The Company's operations are subject to numerous federal, state, and local
laws and regulations pertaining to the discharge of materials into the
environment or otherwise relating to the protection of the environment. The
Company's facilities are located in industrial areas and, therefore, there is
the possibility of incurring environmental liabilities as a result of historic
operations at the Company's sites. Environmental liability can extend to
previously owned or leased properties, properties owned by third parties, and
properties currently owned or leased by the Company. Environmental liabilities
can also be asserted by adjacent landowners or other third parties in toxic tort
litigation. In addition, under the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended ('CERCLA'), and analogous
state statutes, liability can be imposed for the disposal of waste at sites
targeted for cleanup by federal and state regulatory authorities. Liability
under CERCLA is strict as well as joint and several. Environmental laws and
regulations are subject to change in the future, and any failure by the Company
to comply with present or future laws or regulations could subject it to future
liabilities or interruption of production which could have a material adverse
effect on the Company. In addition, changes in environmental regulations could
restrict the Company's ability to expand its facilities or require the Company
to incur substantial unexpected other expenses to comply with such regulations.

In particular, the Company is aware of soil and groundwater contamination
relating to the use of certain underground fuel oil storage tanks at its Fall
River facilities. During 2001, the Company filed Response Action Outcome
Statements (RAOs) and Activities and Use Limitations (AULs) with the
Commonwealth of Massachusetts with respect to soil and groundwater contamination
at two of its facilities. The AULs are intended to limit human access to the
tainted soil and groundwater, close out the sites and end future regulatory
reporting. During the fourth quarter of 2003, the Company terminated the AUL
with respect to one of these facilities at the direction of the Massachusetts
Department of Environmental Protection in order to complete additional response
actions necessary to support the conclusion that a condition of No Significant
Risk has been achieved at the site. Management anticipates that the Company will
complete the additional response actions and file a new AUL with respect to the
site within two years. In addition, during the fourth quarter of 1993 the
Company removed and encapsulated asbestos at two of its facilities and the
Company has an on-going asbestos management program in place to appropriately
maintain the asbestos that remains present at its facilities. During the fourth
quarter of 1998 and the first quarter of 1999 oil-contaminated soil resulting
from a leak during the mid-1970s from an underground fuel storage tank at the
Company's former facility in Claremont, New Hampshire, was removed and disposed
of at an asphalt batching plant. In January 2003, the New Hampshire Department
of Environmental Services issued a 'no further action required' letter with
respect to this site, and a related escrow account originally established to
cover Quaker's clean up cost indemnification obligations was closed out. The
Company has also agreed to indemnify the purchaser of the Company's former
facility in Leominster, Massachusetts, for certain environmental contingencies.

Quaker has also determined that several localized areas of a sixty-acre
parcel of land in Fall River owned by the Company contain surficial soil
contamination from polyaromatic hydrocarbons ('PAHs') and lead, and are thus
subject to the Massachusetts Superfund law. Over eighty percent of the
contaminated soil exists under high-tension power lines. The site is currently
undeveloped and was purchased by the Company during 1998-1999 to provide a
location for the possible future development of a manufacturing and warehouse
facility. The Company engaged the services of a Licensed Site Professional
('LSP') and filed the appropriate notices and reports with the Massachusetts
Department of Environmental Protection. Following the determination of the
vertical and lateral extent of the contamination and the nature of the soil
contamination by the LSP, it was established that the site could be properly
remediated by covering the contaminated soil with a one-foot depth of clean
soil. This was completed during the second half of 2000. Subsequent soil
sampling and laboratory analyses have confirmed that the areas of contamination
have been properly remediated. Additional environmental assessment and
remediation work at the site is anticipated, the final cost of which is
currently uncertain.

The Company acquired two additional manufacturing facilities during the
second half of 2001. Prior to the Company's purchase, comprehensive
environmental site assessments, including soil and

14

groundwater analyses, were completed at both sites by an LSP. As a result of
these assessments, an AUL has been filed with the Commonwealth of Massachusetts
with respect to one of the sites. Further, although urban fill containing waste
material, including coal and ash, was discovered at the other site, the Company
has determined that the 'urban fill' exemption from the assessment and
remediation requirements of the Massachusetts environmental regulations requires
no further action by the Company with respect to this property.

During 2003, the Company entered into agreements with the Massachusetts
Department of Environmental Protection to install air pollution control
equipment on three of the stacks at one of its manufacturing facilities located
in Fall River. The control equipment is intended to ensure that emissions from
the stacks do not exceed the 0% opacity limit set forth in the Company's
operating permit for air emissions. Management anticipates that the costs
associated with the acquisition and installation of the control equipment will
total approximately $900,000 over a three-year period, which began during 2003.
The equipment itself is scheduled to be fully installed by the end of 2005.

The Company has accrued reserves for environmental matters based on
information presently available. Based on this information and the Company's
established reserves, the Company does not believe that these environmental
matters will have a material adverse effect on either the Company's financial
condition or results of operations. However, there can be no assurance that
these reserves will be adequate or that the costs associated with environmental
matters will not increase in the future.

ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to any legal proceedings other than routine legal
proceedings incidental to its business, which, in the opinion of management, are
immaterial in amount or are expected to be covered by the Company's insurance
carriers.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

15

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

The following summarizes common stock prices for the years ended January 3,
2004 and January 4, 2003.

- ---------

(1) The Company's common stock is traded over the counter and is quoted on the
Nasdaq National Market under the symbol 'QFAB.'

(2) No dividends were paid on the Company's common stock prior to fiscal year
2003. During the first quarter of 2003, the Board of Directors adopted a new
dividend policy. This policy provides for future dividends to be declared at
the discretion of the Board of Directors, based on the Board's quarterly
evaluation of the Company's results of operations, cash requirements,
financial condition and other factors deemed relevant by the Board.

(3) As of March 10, 2004, there were approximately 89 record holders of the
Company's common stock.

(4) The Company's Credit Agreement, Senior Notes, and Series A Notes contain
restrictive covenants which limit the Company's ability to declare and pay
dividends. Under the most restrictive of these covenants, $3.8 million was
available for the payment of dividends as of January 3, 2004. See Note 5 of
Notes to Financial Statements.

16

EQUITY COMPENSATION PLAN INFORMATION

(IN THOUSANDS)
JANUARY 3, 2004

EQUITY COMPENSATION PLANS NOT APPROVED BY SECURITY HOLDERS

Options granted under the 1993 Stock Option Plan for certain Company
officers are fully vested and currently cover 53,000 shares of common stock.
When granted, the exercise price of the shares covered by the 1993 Stock Option
Plan was $2.75 per share as to 60%of the shares granted and $1.37 per share as
to 40%of the shares granted. The Company's 1996 Stock Option Plan for certain
key employees currently covers 891,700 shares of common stock. Options granted
under the 1996 Stock Option Plan vest over a five-year period beginning on the
date of each grant. Options are issued at their fair market value at the date of
grant, and the average exercise price for all options granted is $7.86 per
share. Prior to their participation in the Company's 1997 Stock Option Plan in
2001, the Company's non-employee directors were awarded options pursuant to
individual contracts. These options were issued at their fair market value at
the date of grant, and the average exercise price for all such options granted
is $8.19 per share. All options granted to the Company's non-employee directors
under these contracts are fully vested and currently cover a total of 112,500
shares of common stock.

17

ITEM 6. SELECTED FINANCIAL DATA

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND PER YARD AMOUNTS)

The following table sets forth certain consolidated financial and operating
data of the Company for the periods indicated. This selected financial and
operating data should be read in conjunction with the Consolidated Financial
Statements, the Notes thereto and the other financial information included
herein.

- ---------

(1) The fiscal year ended January 4, 2003 was a 53-week period.

(2) Earnings per share is computed using the weighted average number of common
shares and common share equivalents outstanding during the year.

(3) Net capital expenditures reflects assets acquired by purchase and capital
lease.

(4) In the fiscal year ended January 3, 2004, income resulted from a settlement
of a tariff dispute with the Mexican tax authorities. In the fiscal year
ended December 29, 2001, the charge was for costs incurred related to a
potential acquisition which was not completed. See Note 11 to the
Consolidated Financial Statements.

18

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)

The accompanying notes are an integral part of these consolidated financial
statements.

19

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

-------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(AMOUNTS IN THOUSANDS)

The accompanying notes are an integral part of these consolidated financial
statements.

20

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)

The accompanying notes are an integral part of these consolidated financial
statements.

21

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

The accompanying notes are an integral part of these consolidated financial
statements.

22

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

1. OPERATIONS

Quaker Fabric Corporation and subsidiaries (the 'Company' or 'Quaker')
designs, manufactures and markets woven upholstery fabrics primarily for
residential furniture markets and specialty yarns for use in the production of
its own fabrics and for sale to manufacturers of home furnishings and other
products.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Principles of Consolidation. The accompanying consolidated financial
statements include the accounts of Quaker Fabric Corporation and its wholly
owned subsidiaries. All intercompany balances and transactions have been
eliminated in consolidation.

(b) Fiscal Year. The Company's fiscal year ends on the Saturday nearest to
January 1 of each year. The fiscal years ended December 29, 2001 and January 3,
2004 each contained 52 weeks, while the fiscal year ended January 4, 2003
contained 53 weeks.

(c) Reclassifications. Certain prior year amounts have been reclassified to
conform with the current year's presentation. These reclassifications had no
impact on the Company's financial position or results of operations.

(d) Revenue Recognition. Revenue is recognized from product sales when
earned as required by generally accepted accounting principles and in accordance
with SAB 101, 'Revenue Recognition in Financial Statements.' Revenues are
recognized when product shipment has occurred. At that time, the price is fixed
and determinable and collectability is reasonably assured, title and risk of
loss have transferred and all provisions agreed to in the arrangement necessary
for customer acceptance have been fulfilled.

(e) Cash and cash equivalents. Cash and cash equivalents includes cash on
hand, demand deposits and short-term cash investments which are highly liquid in
nature and have original maturities of three months or less.

(f) Allowance for Doubtful Accounts and Sales Returns and Allowances. The
Company performs ongoing credit evaluations of its customers and adjusts credit
limits based upon payment history and the customer's current creditworthiness,
as determined by management's review of their current credit information. The
Company continuously monitors collections and payments from its customers and
maintains a provision for estimated credit losses based upon historical
experience and any specific customer collection issues identified. While such
credit losses have historically been within expectations and the provisions
established, the Company cannot guarantee that credit loss rates in the future
will be consistent with those experienced in the past. The Company's accounts
receivable are spread among approximately 1,000 customers and no single customer
represents more than 4.3% and 6.0% of the accounts receivable balance at
January 3, 2004 and January 4, 2003, respectively.

Management analyzes historical sales and quality returns, current economic
trends, and the Company's quality performance when evaluating the adequacy of
the reserve for sales returns and allowances. Significant management judgments
and estimates must be made and used in connection with establishing the reserve
for sales returns and allowances in any accounting period. The provision for
sales returns and allowances is recorded as a reduction of sales. Material
differences may result in the amount and timing of net sales for any period if
management makes different judgments or uses different estimates.

(g) Inventories. Inventories are stated at the lower of cost or market and
include materials, labor and overhead. A standard cost system is used and
approximates cost on a FIFO basis. Cost for financial

23

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

reporting purposes is determined by the last-in, first-out (LIFO) method.
Inventories consist of the following at January 3, 2004 and January 4, 2003:

LIFO inventory values are higher than FIFO costs because current
manufacturing costs are lower than the older historical costs used to value
inventory on a LIFO basis.

During the year ended January 3, 2004, inventory quantities were reduced.
This reduction resulted in a liquidation of LIFO inventory quantities carried at
higher costs prevailing in prior years as compared with the costs during 2003,
the effect of which increased cost of goods sold by approximately $170 and
decreased net income by approximately $110 or $0.01 per share.

Approximately 65% of finished goods are produced upon receipt of a firm
order. Management, in partnership with key customers, is utilizing forecasting
techniques to significantly reduce delivery lead times. Management regularly
reviews inventory quantities on hand and records a provision for excess and
obsolete inventory based primarily on historical information and estimated
forecasts of product demand and raw material requirements for the next twelve
months.

(h) Property, Plant and Equipment. Property, plant and equipment are stated
at cost. The Company provides for depreciation and amortization on property and
equipment on a straight-line basis over their estimated useful lives as follows:

Buildings and improvements.................................. 32-39 years
Machinery and equipment..................................... 2-20 years
Furniture and fixtures...................................... 5-10 years
Motor vehicles.............................................. 4-5 years
Leasehold improvements...................................... Life of Lease

Maintenance and repairs are charged to operations as incurred. When
equipment and improvements are sold or otherwise disposed of, the asset's cost
and accumulated depreciation are removed from the accounts, and the resulting
gain or loss, if any, is included in the results of operations. Fully
depreciated assets are removed from the accounts when they are no longer in use.

(i) Impairment of Long-Lived Assets. The Company periodically considers
whether there has been a permanent impairment in the value of its long-lived
assets, primarily property and equipment in accordance with Financial Accounting
Standards Board ('FASB') Statement No. 144 ('SFAS No. 144'), 'Accounting for the
Impairment or Disposal of Long-Lived Assets.' The Company evaluates various
factors, including current and projected future operating results and the
undiscounted cash flows for any underperforming long-lived assets. To the extent
that the estimated future undiscounted cash flows are less than the carrying
amount of the asset, the asset is written down to its estimated fair market
value and an impairment loss is recognized. The value of impaired long-lived
assets is adjusted periodically based on changes in these factors. Based on its
review, the Company does not believe that any material impairment of its
long-lived assets has occurred.

(j) Goodwill. Goodwill represents the excess of the purchase price over the
fair value of identifiable net assets acquired. Goodwill was historically
amortized on a straight-line basis over 40 years. In July 2001, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards

24

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

(SFAS) No. 142, 'Goodwill and Other Intangible Assets.' The Company has adopted
the requirements of SFAS No. 142 effective December 30, 2001. SFAS No. 142
requires companies to test all goodwill for impairment at least annually and to
cease amortization of this asset. Amortization expense was approximately $193
for the period ended December 29, 2001. At January 3, 2004, the Company was not
required to recognize any impairment.

(k) Income Taxes. The Company accounts for income taxes under SFAS No. 109,
'Accounting for Income Taxes.' This statement requires that the Company
recognize a current tax liability or asset for current taxes payable or
refundable and a deferred tax liability or asset for the estimated future tax
effects of temporary differences and carryforwards to the extent they are
realizable. A valuation allowance is recorded to reduce the Company's deferred
tax assets to the amount that is more likely than not to be realized. While
management has considered future taxable income and ongoing prudent and feasible
tax planning strategies in assessing the need for the valuation allowance, in
the event management were to determine that the Company would be able to realize
deferred tax assets in the future in excess of the net recorded amount, an
adjustment to the deferred tax asset would increase income in the period such
determination was made. In like manner, should management determine that the
Company would not be able to realize all or part of its net deferred tax asset
in the future, an adjustment to the deferred tax asset would be charged to
income in the period such determination was made. The Company does not provide
for United States income taxes on earnings of subsidiaries outside of the United
States. The Company's intention is to reinvest these earnings permanently.
Management believes that United States foreign tax credits would largely
eliminate any United States taxes or offset any foreign withholding taxes.

(l) Earnings Per Common Share. Basic earnings per common share is computed
by dividing net income by the weighted average number of common shares
outstanding during the period. For diluted earnings per share, the denominator
also includes dilutive outstanding stock options determined using the treasury
stock method. The following table reconciles weighted average common shares
outstanding to weighted average common shares outstanding and dilutive potential
common shares.

(m) Foreign Currency. The assets and liabilities of the Company's Mexican
and Brazilian operations are translated at period-end exchange rates, and
statement of income accounts are translated at weighted average exchange rates.
The resulting translation adjustments are included in the consolidated balance
sheet as a separate component of equity, 'Accumulated Other Comprehensive Loss,'
and foreign currency transaction gains and losses are included with selling,
general and administrative expenses in the consolidated statements of income.

In accordance with SFAS No. 137, 'Accounting for Derivative Instruments and
Hedging Activities -- Deferral of the Effective Date of FASB Statement
No. 133,' the Company adopted SFAS No. 133, 'Accounting for Derivative
Instruments and Hedging Activities' and SFAS No. 138 'Accounting for Certain
Derivative Instruments and Hedging Activities, an Amendment of FASB Statement
No. 133,' (collectively, SFAS No. 133, as amended) effective in fiscal 2001.

SFAS No. 133, as amended, establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded on the balance sheet as
either an asset or liability measured at its fair value. Special accounting

25

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the statement of operations, to the extent
effective, and requires that the Company formally document, designate and assess
the effectiveness of transactions that receive hedge accounting. SFAS No. 133,
as amended, in part, allows special hedge accounting for fair value and cash
flow hedges. The statement provides that the gain or loss on a derivative
instrument designated and qualifying as a fair value hedging instrument, as well
as the offsetting changes in the fair value of the hedged item attributable to
the hedged risk, be recognized currently in earnings in the same accounting
period. SFAS No. 133, as amended, provides that the effective portion of the
gain or loss on a derivative instrument designated and qualifying as a cash flow
hedging instrument be reported as a component of other comprehensive income and
be reclassified into earnings in the same period or periods during which the
hedged forecasted transaction affects earnings. The ineffective portion of a
derivative's change in fair value is recognized currently through earnings
regardless of whether the instrument is designated as a hedge.

The Company enters into forward exchange contracts to hedge the fair value
of foreign currency denominated intercompany accounts payable. The purpose of
the Company's foreign currency hedging activities is to minimize, for a period
of time, the unforeseen impact on the Company's results of operations of
fluctuations in foreign exchange rates. At January 3, 2004, the Company had 22
forward contracts totaling $5,100, all maturing in less than 13 months, to
exchange Brazilian reals and Mexican pesos for U.S. dollars. The Company has
designated these contracts as fair value hedges intended to lock in the expected
cash flows from the repayment of foreign currency denominated intercompany
payables at the available forward rate at the inception of the contract. Changes
in the fair value of the hedge instruments are recognized in earnings. At
January 3, 2004, the fair value of these contracts resulted in a gain of $47.

The Company also enters into forward exchange contracts to hedge the
purchase of fixed assets denominated in foreign currencies. At January 3, 2004,
the Company had two forward contracts for $135 to hedge the purchase of
equipment denominated in a foreign currency. The Company has designated this
hedge as a cash flow hedge intended to reduce the risk of currency fluctuations
from the time of order through delivery of the equipment. The fair value of this
contract is approximately zero as of January 3, 2004.

These derivative financial instruments are for risk management purposes only
and are not used for trading or speculative purposes.

(n) Use of Estimates in the Preparation of Financial Statements. The
presentation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of income and expenses during the reporting
periods. Operating results in the future could vary from the amounts derived
from management's estimates and assumptions. Material estimates that are
particularly susceptible to significant changes in the near term relate to the
determination of income taxes, inventory reserves, accounts receivable reserves,
and self insurance reserves.

(o) Self-Insurance Reserves. The Company is self-insured for workers'
compensation and medical insurance. Quaker has purchased stop loss coverage for
both types of risks in order to minimize the effect of a catastrophic level of
claims. At the end of each accounting period, the reserves for incurred but not
reported claims must be evaluated. Management evaluates claims experience on a
regular basis in consultation with the Company's insurance advisors and makes
adjustments to these reserves as required. Significant management judgments and
estimates must be made and used in connection with evaluating the adequacy of
self-insurance reserves. Material differences may result in the amount and
timing of these costs for any period if management makes different judgments or
uses different estimates.

26

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

(p) Fair Value of Financial Instruments. The Company's financial instruments
mainly consist of cash, accounts receivable, accounts payable, foreign currency
financial instruments and long term debt. The carrying amounts of these
financial instruments as of January 3, 2004 approximate their fair values due to
the short term nature and terms of these instruments, and also the rates
available to the Company for debt and foreign currency financial instruments
with similar terms and remaining maturities.

(q) Shipping and Handling Costs. The Company accounts for shipping and
handling costs in accordance with Emerging Issues Task Force (EITF) Issue 00-10,
'Accounting for Shipping and Handling Fees and Costs' (EITF 00-10). In
accordance with this guidance, the Company records shipping and handling costs
billed to customers as a component of revenue. Shipping and handling costs,
which are included in cost of goods sold are not significant and therefore not
separately disclosed.

(r) Recently Issued Accounting Standards. In January 2003, the FASB issued
Interpretation No. 46 ('FIN 46'), 'Consolidation of Variable Interest Entities,
an interpretation of Accounting Research Bulletin ('ARB') No. 51 ('ARB 51').'
FIN 46 provides guidance that determines (1) whether consolidation is required
or, (2) whether the variable-interest model under FIN 46 should be used to
account for existing and new entities. In addition, FIN 46 requires that both
the primary beneficiary and all other enterprises with a significant variable
interest in a VIE make additional disclosures. FIN 46 is effective for VIEs
which are created after January 31, 2003 and for all VIEs for the first fiscal
year or interim period beginning after June 15, 2003. The Company has evaluated
the provisions of FIN 46 and determined that this interpretation will have no
effect on its consolidated financial statements.

In June 2002, the FASB issued Statement No. 146 ('SFAS 146'), 'Accounting
for Costs Associated with Exit or Disposal Activities.' This statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force Issue No. 94-3
('EITF 94-3'), 'Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs incurred in a
Restructuring).' The provisions of SFAS 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. The Company does not
expect the adoption of this Statement to have a material impact on its financial
statements.

(s) Stock option plans. As more fully described in Note 8, the Company has
stock option plans in effect that provide for the grant of non-qualified stock
options to directors, officers and employees of the Company. The Company applies
APB Opinion 25, 'Accounting for Stock Issued to Employees,' and related
interpretations in accounting for its stock option plans. The exercise price of
stock options, set at the time of grant, is not less than the fair market value
per share at the date of grant. Options have a term of 10 years and generally
vest after 5 years.

27

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

The following table illustrates the effect on net income and earnings per
share as if the Black-Scholes fair value method described in SFAS No. 123,
'Accounting for Stock-Based Compensation,' had been applied to the Company's
stock option plans.

3. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following:

Depreciation and amortization expense related to property, plant and
equipment for the years ending January 3, 2004, January 4, 2003 and
December 29, 2001 was $19,418, $17,723 and $15,154, respectively.

28

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

4. ACCRUED EXPENSES

Accrued expenses consists of the following:

5. DEBT

Debt consists of the following:

On October 10, 1997, the Company issued $30,000 of 7.18% Senior Notes and
$15,000 of 7.09% Senior Notes (the 'Senior Notes'). The Senior Notes are
unsecured and bear interest at fixed rates of 7.18% and 7.09%, payable
semiannually. The Senior Notes may be prepaid in whole or in part prior to
maturity, at the Company's option, subject to a yield maintenance premium, as
defined. On February 14, 2002, the Company issued $5,000 of 7.56% Series A Notes
(the 'Series A Notes'). The Series A Notes are unsecured and bear interest at a
fixed interest rate of 7.56%, payable semiannually. The Series A Notes may be
prepaid in whole or in part prior to maturity, at the Company's option, subject
to a yield maintenance premium, as defined. In addition and also on
February 14, 2002, the Company entered into a $45,000 non-committed Shelf Note
agreement with an insurance company pursuant to which the Company may issue
additional senior notes prior to February 14, 2005 with maturity dates of up to
ten years. As of January 3, 2004, required principal payments are as follows:

Under the terms of the unsecured credit facility (the 'Credit Agreement'),
which was amended and restated on February 14, 2002, the Company may borrow up
to $60,000 through January 31, 2007. Advances made under the Credit Agreement
bear interest at either the prime rate plus 0.25% or the

29

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

Eurodollar rate plus an 'Applicable Margin,' as determined by the Company. The
Applicable Margin on advances is adjusted quarterly based on the Company's
Leverage Ratio as defined in the Credit Agreement. The Applicable Margin for
Eurodollar advances may range from 1.0% to 1.875%. The Company is also required
to pay certain fees including a commitment fee which will vary based on the
Company's Leverage Ratio. As of January 3, 2004, the commitment fee is 0.375%of
the unused portion of the Credit Agreement which was $59,789, net of outstanding
letters of credit of $211. Total commitment fees paid for the year ending
January 3, 2004 were $162. As of January 3, 2004, the Company had $0 outstanding
under the Credit Agreement. As of January 4, 2003, the Company had $16,200
outstanding under the Credit Agreement at an effective interest rate of 3.77%.

The Company is required to comply with a number of affirmative and negative
covenants under the Credit Agreement, the Senior Notes, and the Series A Notes.
Among other things, the Credit Agreement, the Senior Notes and the Series A
Notes require the Company to satisfy certain financial tests and ratios
(including interest coverage ratios, leverage ratios, and net worth
requirements). The Credit Agreement, the Senior Notes and the Series A Notes
also impose limitations on the Company's ability to incur additional
indebtedness, create certain liens, incur capital lease obligations, declare and
pay dividends, make certain investments, and purchase, merge or consolidate with
or into any other corporation. Under the most restrictive of these covenants,
$3.8 million was available for the payment of dividends as of January 3, 2004.
As of January 3, 2004, the Company is in compliance with all debt covenants.

As of January 3, 2004, total debt principal payments for each of the next
five fiscal years and thereafter are as follows:

2004....................................................... $ 5,000
2005....................................................... 5,000
2006....................................................... 15,000
2007....................................................... 15,000
2008....................................................... --
Thereafter................................................. 5,000
-------
$45,000
-------
-------

6. INCOME TAXES

Income (loss) before provision for income taxes consists of:

30

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

The following is a summary of the provision (benefit) for income taxes:

A reconciliation between the provision for income taxes computed at U.S.
federal statutory rates and the amount reflected in the accompanying
consolidated statements of income is as follows:

The Company has approximately $7,300 of state investment tax credit
carryforwards. These state tax credits have no expiration date, however, the
timing and use of these credits is limited under applicable state income tax
legislation. The Company has provided a valuation allowance for a portion of
certain state tax credits that may not be realized.

31

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

The significant items comprising the deferred tax asset/liability are as
follows:

7. COMMITMENTS AND CONTINGENCIES

(a) Income Taxes. The Company is currently challenging tax assessments from
the Internal Revenue Service for the years 1997-1999 and from the Massachusetts
Department of Revenue for the years 1993-1998. The ultimate resolution of these
actions is not expected to have a material impact on the results of operations
or financial position of the Company. In addition, during the third quarter of
2003, the Company filed amended tax returns for these and subsequent years to
claim approximately $3,500 of federal and state research and development
credits. Audits of these amended returns commenced during October 2003. There is
significant uncertainty surrounding the amount and timing of the benefit that
will be ultimately realized. The Company believes that it has a supportable
basis for claiming these credits, but the amounts are subject to ongoing audits
by federal and state authorities. Accordingly, the Company has not reflected the
potential benefits of these credits in its financial statements for these or
subsequent years. No benefit will be recognized in the financial statements
until these gain contingencies are resolved through the eventual disposition
with the respective tax authorities.

(b) Litigation. In the ordinary course of business, the Company is party to
various types of litigation. The Company believes it has meritorious defenses to
all claims and in its opinion, all litigation currently pending or threatened
will not have a material effect on the Company's financial position, results of
operations or liquidity.

(c) Environmental Cleanup Matters. The Company accrues for estimated costs
associated with known environmental matters when such costs are probable and can
be reasonably estimated. The actual costs to be incurred for environmental
remediation may vary from estimates, given the inherent uncertainties in
evaluating and estimating environmental liabilities, including the possible
effects of changing laws and regulations, the stage of the remediation process
and the magnitude of contamination found as the remediation progresses.
During 2003, the Company entered into agreements with the Massachusetts
Department of Environmental Protection to install air pollution

32

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

control equipment at one of its manufacturing plants in Fall River,
Massachusetts. Management anticipates that the costs associated with the
acquisition and installation of the equipment will total approximately $900 over
a three-year period, which began in 2003. Management believes the ultimate
disposition of known environmental matters will not have a material adverse
effect on the liquidity, capital resources, business or consolidated financial
position of the Company.

(d) Leases. The Company leases certain facilities and equipment under
operating lease agreements expiring at various dates from the current year to
the year 2010. As of January 3, 2004, the aggregate minimum future commitments
under leases are as follows:

Rent expense for operating leases for the years ended January 3, 2004,
January 4, 2003 and December 29, 2001 was $4,227, $3,903, and $3,331,
respectively.

(e) Letters of Credit. In the normal course of its business activities, the
Company is required under certain contracts to provide letters of credit which
may be drawn down in the event the Company fails to perform under the contracts.
As of January 3, 2004, the Company had issued or agreed to issue letters of
credit totaling $211.

(f) Employment Contract and Change-in-Control Agreements. In March 2004, the
Company's Board of Directors amended and restated the President and Chief
Executive Officer's Employment Agreement (the Employment Agreement). The
Employment Agreement provides for Mr. Liebenow to continue to serve as President
and Chief Executive Officer of the Company on a full-time basis through
March 12, 2008, subject to an automatic three-year extension, unless terminated
by the Company upon one year's prior notice and provides for certain payments to
be made to Mr. Liebenow following certain termination events occurring in
connection with a change in control. The Employment Agreement provides for a
base salary of $693, subject to such annual increases as may be determined by
the Board of Directors, as well as certain benefits and reimbursement of
expenses.

If the Employment Agreement is terminated as the result of a termination
without cause, Mr. Liebenow would be entitled to receive $2,080, plus the
continuation of certain benefits. If the Employment Agreement is terminated as a
result of a voluntary resignation, Mr. Liebenow would be entitled to receive
$2,080, plus the continuation of certain benefits, provided he agrees not to
engage in competition with the Company for a three year period following his
termination date. If the Employment Agreement is terminated as the result of a
termination for cause, Mr. Liebenow would be entitled to receive the
continuation of certain benefits, plus payment of accrued, but unpaid, salary
and benefits as of his termination date.

During 1999, the Company also entered into change-in-control agreements with
the Company's other corporate officers. These agreements provide certain
benefits to the Company's other officers in the event their employment with the
Company is terminated as a result of a change-in-control as defined. The maximum
contingent liability related to the change-in-control agreements is
approximately $3,000.

33

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

8. STOCK OPTIONS

The Company has several stock option plans (the Plans) in effect that
provide for the granting of non-qualified stock options to directors, officers,
and employees of the Company. Options under the Plans are generally granted at
fair market value and vesting is determined by the Board of Directors.

Stock Option Activity. A summary of the Company's stock option activity is
as follows:

The following table summarizes information for options outstanding and
exercisable at January 3, 2004:

At its regular meeting in December 2001, the Company's Board of Directors
granted options to purchase 160 shares of common stock at an exercise price of
$8.30 per share to certain individuals subject to shareholder approval of an
increase of 750 shares in the number of shares available for grant under the
Plans. At the May 16, 2002 Annual Meeting, shareholder approval was received.
Accordingly, the Company recorded an unearned compensation charge equal to the
difference between the exercise price and the fair value on the date of
shareholder approval of $1,032. During 2003 and 2002, the Company recognized
$206 and $131 of amortization of unearned compensation, respectively.

On December 12, 2003, pursuant to the terms of the Company's 1997 Stock
Option Plan, the Company's Board of Directors granted to Mr. Liebenow, the
Company's President and CEO, options covering 90,000 shares of Common Stock,
10,000 shares of which are subject to shareholder approval at the Company's
Annual Meeting of Shareholders scheduled for May 21, 2004. This option grant
vests

34

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

over a five year period, is exercisable for a period of ten years from the grant
date, and has an exercise price of $9.12 per share, the fair market value of the
Company's Common Stock on December 12, 2003.

Accounting for Stock-Based Compensation. The Company discloses stock-based
compensation information in accordance with SFAS 148 and SFAS 123. SFAS 148
provides additional transition guidance for companies that elect to voluntarily
adopt the provisions of SFAS 123. SFAS 148 does not change the provisions of
SFAS 123 that permit entities to continue to apply the intrinsic value method of
APB 25. The Company has elected to continue to account for its stock option
plans under APB 25 as well as to provide disclosure of stock based compensation
as outlined in SFAS 123 as amended by SFAS 148. SFAS 123 requires disclosure of
pro forma net income, EPS and other information as if the fair value method of
accounting for stock options and other equity instruments described in SFAS 123
had been adopted. SFAS 123 does not apply to awards made prior to June 24, 1995,
and so all pro forma disclosures include the effects of all options granted
after June 24, 1995. Additional awards in future years are anticipated. The
effects of applying SFAS 123 in this pro forma disclosure are not indicative of
future expectations.

Had compensation cost for awards granted in Fiscal 2003, Fiscal 2002 and
Fiscal 2001 under the Company's stock-based compensation plans been determined
based on the fair value at the grant dates consistent with the method set forth
in SFAS No. 123, the effect on the Company's net income and earnings per common
share would have been as follows:

Pro forma compensation expense for options is reflected over the vesting
period; therefore, future pro forma compensation expense may be greater as
additional options are granted.

The Black-Scholes option-pricing model is used to estimate the fair value on
the date of grant of each option granted after December 15, 1994. The
assumptions used for stock option grants and employee stock purchase right
grants were as follows:

The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options with no vesting or transferability
restrictions. In addition, option pricing models require the input of highly
subjective assumptions, including expected stock price volatility. Because the
Company's stock options have characteristics significantly different from those
of traded options and because changes in the subjective input assumptions used
can materially affect the fair value estimate, in

35

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.

9. SEGMENT REPORTING

The Company operates as a single business segment consisting of sales of two
products; upholstery fabric and specialty yarns. Management evaluates the
Company's financial performance in the aggregate and allocates the Company's
resources without distinguishing between yarn and fabric products.

Gross foreign and export sales from the United States to unaffiliated
customers by major geographical area were as follows:

Gross sales by product category are as follows:

Gross sales do not include miscellaneous product sales or sales returns and
allowances, all of which are components of Net Sales disclosed in the Income
Statement.

10. EMPLOYEE BENEFIT PLANS
(reflects actual dollar and share amounts)

The Company has established a 401(k) plan (the 401(k) Plan) for eligible
employees of the Company who may contribute up to 15% of their annual salaries
(up to $12,000 for 2003) to the 401(k) Plan. All contributions made by an
employee are fully vested and are not subject to forfeiture. Each year the
Company contributes on behalf of each participating employee an amount equal to
100% of the first $200 contributed by each employee and 25% of the next $800
contributed by such employee, for a maximum annual Company contribution of $400
per employee. The Company's matching contribution was $595,000, $586,000, and
$483,000, in 2003, 2002, and 2001, respectively. An employee is fully vested in
the contributions made by the Company upon his or her completion of five years
of participation in the 401(k) Plan.

Effective October 1, 1997, the Company established an Employee Stock
Purchase Plan (the ESPP) under which a maximum of 100,000 shares of common stock
may be purchased by eligible employees. All full-time employees of the Company,
other than officers of the Company, are eligible to participate in the ESPP.

The ESPP provides for quarterly 'purchase periods' within each of the
Company's fiscal years. Shares are purchased through payroll deductions (of not
less than 1% nor more than 10% of

36

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

compensation as defined, or up to a maximum of $10,000 in a designated dollar
amount per year.) The purchase price for shares is 85% of the fair market value
of the common stock at the date of purchase. For Fiscal Years 2003, 2002, and
2001 the Company issued 28,774 shares, 19,899 shares, and 22,984 shares
respectively, under the Plan.

11. NON-RECURRING ITEMS

In December 2003, the Company settled a tariff dispute with the Mexican tax
authorities, receiving $1,426 net of legal fees. As a result, a non-recurring,
pre-tax gain of $1,426 ($769 after-tax or $0.05 per diluted share) was recorded
in the fourth quarter of 2003.

In July 2001, the Company's negotiations with a potential acquisition target
were terminated. Costs incurred related to this potential acquisition were $800.
As a result, a non-recurring, pre-tax charge of $800 ($500 after-tax or $0.03
per diluted share) was recorded in the third quarter of Fiscal 2001.

12. SUMMARY QUARTERLY FINANCIAL DATA (UNAUDITED)

The following is a summary of the results of operations for each of the
quarters within the years ended January 3, 2004 and January 4, 2003.

- ---------

(1) All quarters in 2003 and 2002 were 13 weeks except for the fourth quarter of
2002 which contained 14 weeks.

(2) Earnings per common share for the quarters presented have each been
calculated separately. Accordingly, quarterly amounts may not sum to the
fiscal year amount presented.

37

REPORT OF INDEPENDENT AUDITORS

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF QUAKER FABRIC CORPORATION:

In our opinion, the accompanying consolidated balance sheets as of January 3,
2004 and January 4, 2003 and the related consolidated statements of income,
comprehensive income, changes in stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of Quaker Fabric
Corporation and its subsidiaries (the Company) at January 3, 2004 and
January 4, 2003 and the results of their operations and their cash flows for the
fiscal years then ended in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

The financial statements of the Company as of December 29, 2001, were audited by
other independent auditors who have ceased operations. Those independent
auditors expressed an unqualified opinion on those financial statements in their
report dated February 4, 2002, except with respect to the matters discussed in
Note 5 of those financial statements, as to which the date was February 14,
2002.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts
February 19, 2004

38

REPORT OF INDEPENDENT AUDITORS

THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
LLP AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP

TO QUAKER FABRIC CORPORATION:

We have audited the accompanying consolidated balance sheets of Quaker
Fabric Corporation (a Delaware corporation) and subsidiaries as of December 29,
2001 and December 30, 2000, and the related consolidated statements of income,
comprehensive income, changes in stockholders' equity and cash flows for each of
the three years in the period ended December 29, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Quaker
Fabric Corporation and subsidiaries as of December 29, 2001 and December 30,
2000, and the results of their operations and their cash flows for each of the
three years in the period ended December 29, 2001, in conformity with accounting
principles generally accepted in the United States.

/s/ ARTHUR ANDERSEN LLP

Boston, Massachusetts
February 4, 2002 (except with respect
to the matters discussed in Note 5,
as to which the date is February 14, 2002)

39

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following analysis of the financial condition and results of operations
of the Company should be read in conjunction with the Company's Consolidated
Financial Statements and the Notes thereto included elsewhere in this report.

GENERAL

Overview. Quaker is a leading designer, manufacturer and worldwide marketer
of woven upholstery fabrics and one of the largest producers of Jacquard
upholstery fabrics in the world. The Company also manufactures specialty yarns,
most of which are used in the production of the Company's fabric products. The
balance is sold to manufacturers of craft yarns, home furnishings and other
products.

Overall demand levels in the upholstery fabric sector are a function of
overall demand for household furniture, which is, in turn, affected by general
economic conditions, population demographics, new household formations, consumer
confidence and disposable income levels, sales of new and existing homes and
interest rates.

Competition in the industry is intense, from both domestic fabric mills and
fabric mills located outside the U.S. manufacturing products for sale into the
U.S. market. Management believes that competition in the U.S. domestic market is
likely to further intensify following the January 1, 2005 expiration of the
quotas imposed under the Uruguay Round Agreement on Textiles and Clothing on
textile and apparel products coming into the U.S. The Company's fabric products
compete with other furniture coverings, including leather, suede, prints, tufts,
flocks and velvets, for consumer acceptance. Consumer tastes in upholstered
furniture coverings are somewhat cyclical and do change over time, with various
coverings gaining or losing share depending on changes in home furnishing
trends. For example, leather furniture has enjoyed growing popularity over the
past few years, to some extent at the expense of woven fabrics, such as the
Jacquards and other woven fabrics Quaker manufactures.

During 2001, Quaker demonstrated outstanding top line results, particularly
when compared to the performance of the furniture sector as a whole, achieving
record revenues of $331.1 million for the year, up 9.3%, with net income of $9.5
million, new orders up 18.5%during the fourth quarter versus the comparable
period of 2000, and a production backlog at the end of 2001 of $43.0 million.

The Company's order rate remained strong going into 2002, and Quaker's 2002
revenues of $365.4 million and net income of $11.6 million both set new company
records. During the first half of 2002, Quaker's revenues were running at an
annualized rate of approximately $400.0 million, however, global economic
conditions deteriorated as the year progressed, ultimately resulting in a weak
fourth quarter, with domestic fabric sales down 8.9%for the quarter and yarn
sales off significantly. The Company's backlog position at year-end was also
down considerably from $43.0 million in 2001 to $26.1 million at the end of
2002, due to both significant reductions Quaker achieved in its delivery lead
times and weakness in the Company's fourth quarter order rate. During 2002,
Quaker also further strengthened its balance sheet, with the Company generating
approximately $13.0 million of free cash flow during the fourth quarter, thereby
allowing Quaker to reduce funded debt by approximately $13.3 million during the
quarter.

Global economic conditions remained relatively weak during 2003, resulting
in a challenging business environment for Quaker, its suppliers and its
customers. Net sales for the 52-week fiscal year ended January 3, 2004 of $325.3
million were down 11%, with net income of $7.9 million, down 31.3%, and diluted
earnings per share of $0.47. A refund related to the favorable resolution of a
foreign tariff dispute added $1.4 million of non-recurring income to fiscal 2003
pre-tax income, increasing diluted EPS for the year by 5 cents.

Uncertainty surrounding the global economic and geopolitical environment
continued to put pressure on the Company's fabric sales, with 2003 domestic
fabric sales down 9.5%and export sales down 17%versus 2002. While the Company's
2003 yarn revenues were also down 32.2%, yarn sales for the fourth quarter of
$3.1 million were up 11.6%versus the comparable period of 2002, primarily as a
result of the steps taken during the year to strategically reposition that
segment of the Company's business.

40

Despite a drop of a little over $40.0 million in Quaker's 52-week revenues
for the year compared to 2002's 53-week fiscal year, the Company's gross margin
declined only 30 basis points, showing particular improvement in the fourth
quarter. Quaker's operating margin, however, was down 130 basis points for the
year, largely because of the ongoing costs associated with the strategic
investments the Company has made over the past few years to build competitive
advantage, particularly in the areas of research and development, product
styling and design, and information and supply chain management. The 11%
year-over-year decrease in the Company's revenues caused those investments to
push up Quaker's 'SG&A as a percentage of revenues' results for the year and
kept the Company from achieving its 'SG&A as a percentage of revenues'
objectives. Management believes, however, that these investments will fuel
Quaker's future growth as the economy improves.

In addition, during 2003, Quaker reduced inventory, paid dividends for the
first time, generated improved cash flows, and paid down debt -- ending the year
with a net debt to total capitalization ratio of 18.9%, versus 28.7%at the end
of 2002. As a result, the Company's balance sheet was further strengthened,
positioning Quaker to continue responding quickly to new challenges and
opportunities as they arise. Quaker's success during 2004 will, of course,
depend, in part, on whether -- and to what degree -- macroeconomic conditions
improve. And the Company will be continuing to follow trade patterns affecting
the industry.

Quarterly Operating Results. The following table sets forth certain
unaudited condensed consolidated statements of income data for the eight fiscal
quarters ended January 3, 2004, as well as certain data expressed as a
percentage of the Company's total net sales for the periods indicated:

- ---------

The data reflected in this table has been derived from unaudited financial
statements that, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for the fair
presentation of such information when read in conjunction with the Company's
Consolidated Financial Statements and the Notes thereto contained elsewhere in
this report. Fiscal year 2003 contained 52 weeks while fiscal year 2002 was 53
weeks. The fourth quarters of fiscal years 2003 and 2002 contained 13 and 14
weeks, respectively.

-------------------

The Company follows industry practice by closing its operating facilities
for a one-to-two week period during July of each year. In 2002, this shutdown
period, and the resulting effect on sales, occurred in the third fiscal quarter.
In 2003, the shutdown period, and the resulting effect on sales, was split
between the second and third fiscal quarters.

41

Product Mix. By offering a broad assortment of fabrics at each price point
and in each styling category, the Company has positioned itself as a full
service supplier of Jacquard and plain woven fabrics to the upholstered
furniture segment. While Quaker offers a full range of fabrics to its
promotional-end customers, the Company's primary focus is on the development of
products for the middle to upper-end of the market, where Quaker's design,
technology and manufacturing expertise provide the Company with the greatest
competitive advantage. Quaker's product line is divided into three distinct
branded collections, with its Davol'TM', Quaker'TM', and Whitaker'r' Collections
intended to meet the styling, design, quality and pricing needs of the
promotional, middle to better, and better to upper ends of the market,
respectively.

Geographic Distribution of Fabric Sales. To develop markets for upholstery
fabric outside the United States, the Company has placed substantial emphasis on
building both direct exports from the United States as well as sales from its
distribution centers in Mexico and Brazil. The following table sets forth
certain information about the changes which have occurred in the geographic
distribution of the Company's gross fabric sales since 2001:

- ---------

(1) Foreign sales consists of both direct exports from the United States as well
as sales from the Company's distribution centers in Mexico and Brazil.

CRITICAL ACCOUNTING ESTIMATES

The following is a brief discussion of the more significant accounting
estimates used by the Company.

GENERAL

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. The most significant estimates and assumptions relate to
accounts receivable reserves, inventory valuation and inventory reserves, and
self-insurance reserves. Actual amounts could differ significantly from these
estimates.

ALLOWANCE FOR DOUBTFUL ACCOUNTS AND SALES RETURNS AND ALLOWANCES

The Company performs ongoing credit evaluations of its customers and adjusts
credit limits based upon payment history and the customer's current
creditworthiness, as determined by management's review of their current credit
information. The Company continuously monitors collections and payments from its
customers and maintains a provision for estimated credit losses based upon
historical experience and any specific customer collection issues identified.
While such credit losses have historically been within expectations and the
provisions established, the Company cannot guarantee that credit loss rates in
the future will be consistent with those experienced in the past. The Company's
accounts receivable are spread among more than 1,000 customers and no single
customer represents more than 4.3% and 6.0% of the accounts receivable balance
at January 3, 2004 and January 4, 2003, respectively.

42

Management analyzes historical sales and quality returns, current economic
trends, and the Company's quality performance when evaluating the adequacy of
the reserve for sales returns and allowances. Significant management judgments
and estimates must be made and used in connection with establishing the reserve
for sales returns and allowances in any accounting period. Material differences
may result in the amount and timing of the Company's net sales for any period if
management makes different judgments or uses different estimates.

INVENTORIES

Inventory is valued using the last-in, first-out (LIFO) method.
Approximately 65%of finished goods are produced upon receipt of a firm order.
Management, in partnership with key customers, is utilizing forecasting
techniques to significantly reduce delivery lead times. Management regularly
reviews inventory quantities on hand and records a provision for excess and
obsolete inventory based primarily on historical information and estimated
forecasts of product demand and raw material requirements for the next twelve
months. A significant increase in demand for the Company's products could result
in a short-term increase in manufacturing costs, including but not limited to
overtime and other costs related to capacity constraints in certain areas of the
Company. A significant decrease in demand could result in an increase in the
amount of excess inventory quantities on hand. Additionally, assumptions used in
determining management's estimates of future product demand may prove to be
incorrect, in which case the provision required for excess and obsolete
inventory would have to be adjusted in the future. If inventory is determined to
be overvalued, the Company would be required to recognize such costs as cost of
goods sold at the time of such determination. Therefore, although every effort
is made to ensure the accuracy of management's forecasts of future product
demand, any significant unanticipated changes in demand could have a significant
impact on the value of the Company's inventory and the Company's reported
operating results.

SELF-INSURANCE RESERVES

The Company is self-insured for workers' compensation and medical insurance.
Quaker has purchased stop loss coverage for both types of risks in order to
minimize the effect of a catastrophic level of claims. At the end of each
accounting period, the reserves for incurred but not reported claims must be
evaluated. Management evaluates claims experience on a regular basis in
consultation with the Company's insurance advisors and makes adjustments to
these reserves. Significant management judgments and estimates must be made and
used in connection with evaluating the adequacy of self-insurance reserves.
Material differences may result in the amount and timing of these costs for any
period if management makes different judgments or uses different estimates.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is depreciated over the estimated useful
lives. Useful lives are based on management's estimates of the period that the
assets will generate revenue. These assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying value of an asset
may not be recoverable. Reductions in the useful lives of the Company's fixed
assets would have an adverse impact on the Company's financial results.

INCOME TAXES

The Company accounts for income taxes under SFAS No. 109, 'Accounting for
Income Taxes.' This statement requires that the Company recognize a current tax
liability or asset for current taxes payable or refundable and a deferred tax
liability or asset for the estimated future tax effects of temporary differences
and carryforwards to the extent they are realizable. A valuation allowance is
recorded to reduce the Company's deferred tax assets to the amount that is more
likely than not to be realized. While management has considered future taxable
income and ongoing prudent and feasible tax planning strategies in assessing the
need for the valuation allowance, in the event management were to determine that
the Company would be able to realize deferred tax assets in the future in excess
of the net recorded amount, an adjustment to the deferred tax asset would
increase income in the period such

43

determination was made. Likewise, should management determine that the Company
would not be able to realize all or part of its net deferred tax asset in the
future, an adjustment to the deferred tax asset would be charged to income in
the period such determination was made. The Company does not provide for United
States income taxes on earnings of subsidiaries outside of the United States.
The Company's intention is to reinvest these earnings permanently. Management
believes that United States foreign tax credits would largely eliminate any
United States taxes or offset any foreign withholding taxes.

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the FASB issued Interpretation No. 46 ('FIN 46'),
'Consolidation of Variable Interest Entities, an interpretation of Accounting
Research Bulletin No. 51 ('ARB 51').' The primary objectives of FIN 46 are to
provide guidance on the identification of, and financial reporting for, entities
for which control is achieved through means other than through voting rights;
such entities are known as variable-interest entities (VIEs). FIN 46 provides
guidance that determines (1) whether consolidation is required under (a) the
'controlling financial interest' model of ARB 51, 'Consolidated Financial
Statements,' or (b) other existing authoritative guidance, or alternatively,
(2) whether the variable-interest model under FIN 46 should be used to account
for existing and new entities. In addition, FIN 46 requires that both the
primary beneficiary and all other enterprises with a significant variable
interest in a VIE make additional disclosures. FIN 46 is effective for VIEs
which are created after January 31, 2003 and for all VIEs for the first fiscal
year or interim period beginning after June 15, 2003. The Company has evaluated
the provisions of FIN 46 and determined that this interpretation will have no
effect on its consolidated financial statements.

In December 2002, the FASB issued Statement No. 148 ('SFAS 148'),
'Accounting for Stock-Based Compensation.' SFAS 148 amends FASB Statement
No. 123 ('SFAS 123'), 'Accounting for Stock-Based Compensation,' to provide
alternative methods of transition for an entity that voluntarily adopts the
accounting provisions of SFAS 123. SFAS 148 amends the disclosure requirements
of SFAS 123 to require prominent disclosure in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The provisions of
SFAS 148 are effective for fiscal years ending after December 15, 2002. The
Company has elected to continue to account for stock option plans under
Accounting Principles Board Opinion No. 25, 'Accounting for Stock Issued to
Employees,' as well as to provide disclosure of stock based compensation as
outlined in SFAS 123, as amended by SFAS 148.

In November 2002, the FASB issued Interpretation No. 45 ('FIN 45'),
'Guarantor's Accounting and Disclosure Requirements for Guarantees, including
Indirect Guarantees of Indebtedness of Others, and interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 44.'
FIN 45 elaborates on the existing disclosure requirements for most guarantees,
including loan guarantees such as standby letters of credit. It also clarifies
that at the time a company issues a guarantee, the company must recognize an
initial liability for the fair value, or market value, of the obligations it
assumes under that guarantee and must disclose that information in its interim
and annual financial statements. FIN 45 is effective on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end. The disclosure requirements in FIN 45 are effective
for financial statements of interim or annual periods ending after December 15,
2002. The Company has adopted the disclosure provisions of FIN 45 and determined
that this interpretation had no material effect on its consolidated financial
statements.

In June 2002, the FASB issued Statement No. 146 ('SFAS 146'), 'Accounting
for Costs Associated with Exit or Disposal Activities.' This statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force Issue No. 94-3
('EITF 94-3'), 'Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs incurred in a
Restructuring).' The provisions of SFAS 146 are effective for exit or disposal
activities that are initiated after December 31, 2002.

44

RESULTS OF OPERATIONS

FISCAL 2003 COMPARED TO FISCAL 2002

Net Sales. Net sales for 2003 decreased $40.1 million, or 11.0%, to $325.3
million from $365.4 million in 2002. Gross fabric sales decreased due to
decreases in both domestic and foreign fabric sales. Gross fabric sales within
the United States decreased 9.5%, to $277.3 million in 2003 from $306.5 million
in 2002, as a result of increased competition from leather and poor
macroeconomic conditions for much of the year, particularly in the furniture
sector. Foreign sales decreased 17.0%, to $40.6 million in 2003 from $48.8
million in 2002. This decrease in foreign sales was due primarily to lower sales
in Mexico, Canada and the Middle East. In Mexico, where the Company competes
primarily with Mexican fabric mills, weakness in the Mexican peso versus the
U.S. dollar caused the Company to be at a competitive disadvantage vis a vis
Mexican domestic mills for much of Fiscal 2003. A significant portion of
furniture manufactured in Canada is actually sold in the United States. As a
result of a strong Canadian dollar during Fiscal 2003, Canadian furniture sales
into the United States declined, reducing demand for the Company's upholstery
fabric in Canada. The political climate in the Middle East during 2003
negatively impacted sales into that region. Gross yarn sales decreased 32.2%, to
$10.8 million in 2003 from $15.9 million in 2002.

The gross volume of fabric sold decreased 12.1%, to 56.1 million yards in
2003 from 63.8 million yards in 2002. The weighted average gross sales price per
yard increased 1.6%, to $5.66 in 2003 from $5.57 in 2002 as a result of product
mix changes. The Company sold 15.1%fewer yards of middle to better-end fabrics
and 6.7%fewer yards of promotional-end fabrics in 2003 than in 2002. The average
gross sales price per yard of middle to better-end fabrics increased by 3.1%, to
$6.63 in 2003 from $6.43 in 2002. The average gross sales price per yard of
promotional-end fabrics increased by 2.0%, to $4.08 in 2003 from $4.00 in 2002.

Gross Margin. The gross margin percentage for 2003 decreased to 21.6%as
compared to 21.9%for 2002. Gross profit declined by $4.4 million due to lower
production volumes resulting in higher fixed costs per unit. Also, total fixed
costs increased by approximately $1.0 million in 2003 as compared to 2002
primarily due to an increase in depreciation expense. These higher unit costs
were partially offset by improvements in manufacturing operating performance and
raw material cost reductions.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $55.3 million in 2003 from $56.9 million in
2002. Selling, general and administrative expenses as a percentage of net sales
were 17.0%and 15.6%in 2003 and 2002, respectively. The decrease in selling,
general and administrative expenses was due to lower variable costs, such as
sales commissions, resulting from lower sales. Selling, general and
administrative expenses were higher as a percentage of net sales due to lower
sales.

Interest Expense, Net. Interest expense decreased to $3.9 million in 2003
from $4.6 million in 2002. Lower average levels of senior debt, and lower rates
of interest were the primary reasons for the decrease.

Effective Tax Rate. The Company's effective tax rate was 35.4%for 2003 and
37.0%for 2002. The Company provides for income taxes on an interim basis, using
an estimated annual effective income tax rate. The Company's estimated tax rate
was 37%for 2002 and the first quarter of 2003. In the second quarter of 2003,
the Company adjusted the estimated annual effective tax rate for 2003 downward
to 34%. This reduction in the tax rate is due to lower levels of projected
income for 2003 reducing the effective statutory federal tax rate from 35% to
approximately 34%and an increased estimated benefit to the tax rate from the
Extraterritorial Income Exclusion. In the fourth quarter of 2003, the Company
adjusted the annual effective tax rate to 35.4%. This increase was due to the
tariff refund received from the Mexican tax authorities during the fourth
quarter which was taxed at a higher rate. The effective income tax rate is lower
than the combined federal and state statutory rates, due primarily to certain
tax benefits related to extraterritorial income at the federal level and
investment tax credits at the state level.

The Company is currently challenging tax assessments from the Internal
Revenue Service for the years 1997-1999 and from the Massachusetts Department of
Revenue for the years 1993-1998. The ultimate resolution of these actions is not
expected to have a material impact on the results of

45

operations or financial position of the Company. In addition, during the third
quarter, the Company filed amended tax returns for these and subsequent years to
claim approximately $3.5 million of federal and state research and development
credits. Audits of these amended returns commenced during October 2003. There is
significant uncertainty surrounding the amount and timing of the benefit that
will be ultimately realized, if any. The Company believes that it has a
supportable basis for claiming these credits, but the amounts are subject to
ongoing audits by federal and state authorities. Accordingly, the Company has
not reflected the potential benefits of these credits in its financial
statements for these or subsequent years. No benefit will be recognized in the
financial statements until these gain contingencies are resolved through the
eventual disposition with the respective tax authorities.

FISCAL 2002 COMPARED TO FISCAL 2001

Net Sales. Net sales for 2002 increased $34.3 million, or 10.4%, to $365.4
million from $331.1 million in 2001. Gross fabric sales increased due to
increases in both domestic and foreign fabric sales. Gross fabric sales within
the United States increased 13.5%, to $306.5 million in 2002 from $270.0 million
in 2001. Foreign sales increased 15.6%, to $48.8 million in 2002 from $42.3
million in 2001. This increase in foreign sales was due to improved sales in
Mexico and Canada as well as increased penetration of other international
markets. Gross yarn sales decreased 31.5%, to $15.9 million in 2002 from $23.2
million in 2001.

The gross volume of fabric sold increased 12.6%, to 63.8 million yards in
2002 from 56.7 million yards in 2001. The weighted average gross sales price per
yard increased 1.1%, to $5.57 in 2002 from $5.51 in 2001. The Company sold 2.6%
more yards of middle to better-end fabrics and 36.6%more yards of
promotional-end fabrics in 2002 than in 2001. The average gross sales price per
yard of middle to better-end fabrics increased by 4.6%, to $6.43 in 2002 from
$6.15 in 2001. The average gross sales price per yard of promotional-end fabrics
increased by 1.3%, to $4.00 in 2002 from $3.95 in 2001.

Gross Margin. The gross margin percentage for 2002 increased to 21.9%as
compared to 21.2%for 2001. Improvements in raw material yields on a per unit
basis accounted for approximately $8.4 million in cost reductions compared to
the prior year. Increased manufacturing capacity resulted in a drop in the
Company's overtime requirements, reducing overtime costs by approximately $1.1
million. Distribution of revenues among the fiscal quarters also affects the
incurrence of overtime. In 2002 record sales during the first half of the year
resulted in significant overtime costs, while less overtime was incurred during
the second half of the year because of lower demand for the Company's products.
The production of second quality fabric increased during 2002, offsetting these
margin improvements by approximately $2.4 million and fixed overhead costs
increased by approximately $8.5 million as compared to 2001. All other variable
costs increased by approximately $1.0 million.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $56.9 million in 2002 from $50.5 million in
2001. Selling, general and administrative expenses as a percentage of net sales
were 15.6%and 15.3%in 2002 and 2001, respectively. The increase in selling,
general and administrative expenses was due to higher variable costs, such as
sales commissions, resulting from higher sales. Additionally, labor and related
costs and sampling expenses were each up $2.2 million as compared to 2001.

Interest Expense, Net. Interest expense increased to $4.6 million in 2002
from $4.1 million in 2001. Higher average levels of senior debt, partially
offset by lower rates of interest were the primary reasons for the increase.

Effective Tax Rate. The Company's effective tax rate was 37.0%for 2002 and
36.0%for 2001. The effective income tax rate is lower than the combined federal
and state statutory rates due primarily to certain tax benefits related to
extraterritorial income at the federal level and investment tax credits at the
state level. The effective tax rate increased in 2002 principally due to lower
federal tax credits. See Note 6 of the Notes to Consolidated Financial
Statements included elsewhere in this report. Based upon existing tax laws and
our operating plans for 2003, we anticipate the effective tax rate will be
similar to 2002.

46

LIQUIDITY AND CAPITAL RESOURCES

The Company historically has financed its operations and capital
requirements through a combination of internally generated funds, borrowings
under the Credit Agreement (as hereinafter defined), and debt and equity
offerings. The Company's capital requirements have arisen principally in
connection with (i) the purchase of equipment to expand production capacity,
introduce new technologies to broaden and differentiate the Company's products,
and improve the Company's quality and productivity performance (ii) increases in
the Company's working capital needs related to its sales growth, and
(iii) investments in the Company's information technology systems.

The primary source of the Company's liquidity and capital resources has been
operating cash flow. The Company's net cash provided by operating activities was
$34.5 million, $29.1 million and $23.6 million in 2003, 2002 and 2001
respectively. As necessary, the Company supplements its operating cash flow with
borrowings. Net borrowings (repayments) were ($21.2 million) in 2003, $2.0
million in 2002 and $8.8 million in 2001.

Capital expenditures in 2003, 2002, and 2001 were $7.9 million, $32.1
million, and $32.6 million respectively. Capital expenditures during 2003 were
funded by operating cash flow and borrowings. Management anticipates that
capital expenditures for new projects will total approximately $14.8 million in
2004, consisting principally of $8.7 million for various manufacturing
equipment, $2.7 million for IT projects and $3.4 million for various other
capital projects. Management believes that operating income and borrowings under
the Credit Agreement (as hereinafter defined) will provide sufficient funding
for the Company's capital expenditure and working capital needs for the
foreseeable future.

As discussed in Note 5 of the Notes to Consolidated Financial Statements,
the Company issued $45.0 million of Senior Notes due October 2005 and 2007 (the
Senior Notes) during 1997. The Senior Notes bear interest at a fixed rate of
7.09%on $15.0 million and 7.18%on $30.0 million. Annual principal payments begin
on October 10, 2003 with a final payment due October 10, 2007. The $5.0 million
due October 10, 2003 was paid.

Also on February 14, 2002, the Company issued $5.0 million of 7.56%
Series A Notes due February 2009 (the 'Series A Notes'). The Series A Notes are
unsecured and bear interest at a fixed interest rate of 7.56%, payable
semiannually. The Series A Notes may be prepaid in whole or in part prior to
maturity, at the Company's option, subject to a yield maintenance premium, as
defined. In addition and also on February 14, 2002, the Company entered into a
$45.0 million non-committed Shelf Note agreement with an insurance company
pursuant to which the Company may issue additional senior notes prior to
February 14, 2005 with maturity dates of up to ten years.

The Company also has a $60.0 million unsecured Credit Agreement with a bank
which expires January 31, 2007 (the Credit Agreement). As of January 3, 2004,
the Company had no loan outstanding under the Credit Agreement and unused
availability of $59.8 million. See Note 5 of Notes to Consolidated Financial
Statements included elsewhere in this report.

The Company is required to comply with a number of affirmative and negative
covenants under the Credit Agreement, the Senior Notes, and the Series A Notes,
including, but not limited to, maintenance of certain financial tests and ratios
(including interest coverage ratios, net worth related ratios, and net worth
requirements); limitations on certain business activities of the Company;
restrictions on the Company's ability to declare and pay dividends, incur
additional indebtedness, create certain liens, incur capital lease obligations,
make certain investments, engage in certain transactions with stockholders and
affiliates, and purchase, merge, or consolidate with or into any other
corporation. The Company is currently in compliance with all of the affirmative
and negative covenants in the Credit Agreement and the Series A and Senior Notes
and management believes the Company's continued compliance will not prevent the
Company from operating in the normal course of business.

47

The following table sets forth contractual obligations and commitments due
as of January 3, 2004:

The Company has historically not paid dividends, instead using earnings to
fund strategic investments and capital equipment requirements. No dividends were
paid on the Company's common stock prior to fiscal year 2003. During the first
quarter of 2003, the Board of Directors adopted a new dividend policy. This
policy provides for future dividends to be declared at the discretion of the
Board of Directors, based on the Board's quarterly evaluation of the Company's
results of operations, cash requirements, financial condition and other factors
deemed relevant by the Board. In 2003, the Company paid cash dividends of $1,675
or $0.10 per common share. On February 19, 2004, the Board of Directors declared
a cash dividend of $0.03 per common share payable on March 19, 2004 to
shareholders of record on March 5, 2004.

INFLATION

The Company does not believe that inflation has had a significant impact on
the Company's results of operations for the periods presented. Historically, the
Company believes it has been able to minimize the effects of inflation by
improving its manufacturing and purchasing efficiency, by increasing employee
productivity, and by reflecting the effects of inflation in the selling prices
of the new products it introduces each year.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Statements contained in this report, as well as oral statements made by the
Company that are prefaced with the words 'may,' 'will,' 'expect,' 'anticipate,'
'continue,' 'estimate,' 'project,' 'intend,' 'designed' and similar expressions,
are intended to identify forward-looking statements regarding events, conditions
and financial trends that may affect the Company's future plans of operations,
business strategy, results of operations and financial position. These
statements are based on the Company's current expectations and estimates as to
prospective events and circumstances about which the Company can give no firm
assurance. Further, any forward-looking statement speaks only as of the date on
which such statement is made, and the Company undertakes no obligation to update
any forward-looking statement to reflect events or circumstances after the date
on which such statement is made. As it is not possible to predict every new
factor that may emerge, forward-looking statements should not be relied upon as
a prediction of the Company's actual future financial condition or results.
These forward-looking statements like any forward-looking statements, involve
risks and uncertainties that could cause actual results to differ materially
from those projected or anticipated. Such risks and uncertainties include
product demand and market acceptance of the Company's products, regulatory
uncertainties, the effect of economic conditions, the impact of competitive
products and pricing, foreign currency exchange rates, changes in customers'
ordering patterns, and the effect of uncertainties in markets outside the U.S.
(including Mexico and South America) in which the Company operates.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

DERIVATIVE FINANCIAL INSTRUMENTS, OTHER FINANCIAL INSTRUMENTS, AND DERIVATIVE
COMMODITY INSTRUMENTS

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's exposures relative to market risk are due to foreign exchange
risk and interest rate risk.

48

FOREIGN CURRENCY RISK

Approximately 3.0%of the Company's revenues are generated outside the U.S.
from sales which are not denominated in U.S. dollars. Foreign currency risk
arises because the Company engages in business in Mexico and Brazil in local
currency. Accordingly, in the absence of hedging activities, whenever the U.S.
dollar strengthens relative to the other major currencies, there is an adverse
affect on the Company's results of operations, and alternatively, whenever the
U.S. dollar weakens relative to the other major currencies, there is a positive
affect on the Company's results of operations.

It is the Company's policy to minimize, for a period of time, the unforeseen
impact on its results of operations of fluctuations in foreign exchange rates by
using derivative financial instruments to hedge the fair value of foreign
currency denominated intercompany payables. The Company's primary foreign
currency exposures in relation to the U.S. dollar are the Mexican peso and the
Brazilian real.

At January 3, 2004, the Company had the following significant derivative
financial instruments to hedge the anticipated cash flows from the repayment of
foreign currency denominated intercompany payables outstanding:

The Company estimated the change in the fair value of all derivative
financial instruments assuming both a 10%strengthening and weakening of the U.S.
dollar relative to all other major currencies. In the event of a 10%
strengthening of the U.S. dollar, the change in fair value of all derivative
financial instruments would result in approximately a $0.5 million unrealized
gain; whereas a 10%weakening of the U.S. dollar would result in approximately a
$0.6 million unrealized loss.

INTEREST RATE RISK

All of the Company's long-term debt is at fixed rates. Accordingly, a change
in interest rates has an insignificant effect on the Company's interest expense.
The fair value of the Company's long-term debt, however, would change in
response to interest rate movements due to its fixed rate nature.

Using a scenario analysis, the Company has evaluated the impact on all
long-term maturities of changing the interest rate 10% from the rate levels that
existed at January 3, 2004 and has determined that such a rate change would not
have a material impact on the Company.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required under Item 8 is included in Item 6.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

(a) Previous independent accountants

(i) On June 14, 2002, the Audit Committee of the Board of Directors of
the Company dismissed its independent auditors, Arthur Andersen LLP
('Andersen'). The Company's Audit Committee is responsible for the selection
and replacement of the Company's independent auditors.

(ii) The reports of Andersen on the financial statements for the two
fiscal years immediately prior to the dismissal contained no adverse opinion
or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principle.

(iii) In connection with its audits for the two fiscal years immediately
prior to the dismissal and through June 14, 2002, there were no
disagreements with Andersen on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure,
which

49

disagreements if not resolved to the satisfaction of Andersen would have
caused them to make reference thereto in their report on the financial
statements for such years.

(iv) During the two fiscal years immediately prior to the dismissal and
through June 14, 2002, there were no reportable events (as defined in
Regulation S-K Item 304(a)(1)(v)).

(v) Andersen furnished the Company with a letter, dated June 17, 2002
and addressed to the Securities and Exchange Commission, which stated that
it agreed with the above statements. A copy of the letter was filed as an
exhibit to the Form 8-K filed by the Company on June 19, 2002 to report that
the Audit Committee of the Board of Directors of the Company had dismissed
Andersen as its independent auditors and engaged PricewaterhouseCoopers LLP
('PWC') to act as its new independent auditors as of June 14, 2002.

(b) New independent accountants

(i) The Company engaged PWC as its new independent auditors as of
June 14, 2002. During the two fiscal years immediately prior to the
engagement and through June 14, 2002, the Company had not consulted with PWC
regarding either: (i) the application of accounting principles to a
specified transaction, either completed or proposed; or the type of audit
opinion that might be rendered on the Company's financial statements, and no
written report or oral advice was provided to the Company by PWC which PWC
concluded was an important factor considered by the Company in reaching a
decision as to an accounting, auditing or financial reporting issue; or
(ii) any matter that was either the subject of a disagreement, as that term
is defined in Item 304(a)(1)(iv) of Regulation S-K and the related
instructions to Item 304 of Regulation S-K, or a reportable event, as that
term is defined in Item 304(a)(1)(v) of Regulation S-K.

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure controls and procedures have been established to ensure that
material information relating to the Company is made known to management,
including the Company's Chief Executive Officer and Chief Financial Officer, and
the Board of Directors.

Based on their evaluation of January 3, 2004, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures (as defined in Rules 13a-15[c] and 15d-15[e] under the
Securities and Exchange Act of 1934) are effective to ensure that the
information required to be disclosed by the Company in reports that it files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported as and when required.

There have been no changes in the Company's internal controls over financial
reporting or in other factors which could materially affect internal controls
over financial reporting subsequent to the date the Company carried out its
evaluation. There were no significant deficiencies or material weaknesses
identified in the evaluation and, therefore, no corrective actions were taken.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information with respect to the directors of the Company required by
this item will be included in the Company's definitive proxy statement for its
2004 Annual Meeting of Stockholders (the 'Proxy Statement') to be filed pursuant
to Regulation 14A, and such information is incorporated herein by reference. The
information with respect to the executive officers of the Company required by
this item is set forth in Item 1A of this Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item will be included in the Proxy
Statement to be filed pursuant to Regulation 14A, and such information is
incorporated herein by reference.

50

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The information required by this item will be included in the Proxy
Statement to be filed pursuant to Regulation 14A, and such information is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item will be included in the Proxy
Statement to be filed pursuant to Regulation 14A, and such information is
incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item will be included in the Proxy
Statement to be filed pursuant to Regulation 14A, and such information is
incorporated herein by reference.

51

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Documents filed as part of this Form 10-K

(i) Financial Statements

Consolidated Balance Sheets -- January 3, 2004 and January 4, 2003

Consolidated Statements of Income -- For the years ended January 3, 2004,
January 4, 2003 and December 29, 2001

Consolidated Statements of Comprehensive Income -- For the years ended
January 3, 2004, January 4, 2003 and December 29, 2001

Consolidated Statements of Changes in Stockholders' Equity -- For the years
ended January 3, 2004, January 4, 2003, and December 29, 2001

Consolidated Statements of Cash Flows -- For the years ended January 3, 2004,
January 4, 2003 and December 29, 2001

Notes to Consolidated Financial Statements

Report of Independent Public Auditors

(ii) Financial Statement Schedules

The following financial statement schedule of the Company included herein
should be read in conjunction with the audited financial statements incorporated
by reference in this Form 10-K.

Schedule II -- Valuation and Qualifying Accounts

Report of Independent Auditors on Financial Statement Schedule.

All other schedules for the Company are omitted because either they are not
applicable or the required information is shown in the financial statements or
notes thereto.

(b) Reports on Form 8-K

The Company filed a report on Form 8-K on October 23, 2003, in which the
Company furnished a press release announcing its third quarter results for the
period ending October 4, 2003.

(c) Exhibits

3(i) -- Certificate of Incorporation of the Company, as
amended.(1)
3(ii) -- By-laws of the Company.(1)
10.1 -- Loan and Security Agreement, dated as of October 31,
1990, between the Company and Continental Bank N.A., as
amended by Amendments Nos. 1 through 9 thereto.(1)
10.2 -- Securities Purchase Agreement, dated April 13, 1993,
among the Company, MLGA Fund II, L.P. and MLGAL Partners,
as amended by Amendment No. 1 thereto.(1)
10.3 -- Subscription Agreement, dated March 12, 1993, among the
Company and MLGA Fund II, L.P., Nortex Holdings, Inc., QFC
Holdings Corporation, and Larry Liebenow.(1)
10.4 -- Shareholders Agreement, dated March 12, 1993, by and
among the Company, Larry Liebenow, Ira Starr, and Sangwoo
Ahn.(1)
10.5 -- Employment Agreement, dated as of March 12, 1993, between
the Company and Larry A. Liebenow.(1)
10.6 -- Director Indemnification Contract, dated October 18,
1989, between the Company and Larry A. Liebenow.(1)
10.7 -- Director Indemnification Contract, dated October 18,
1989, between the Company and Roberto Pesaro.(1)
10.8 -- Director Indemnification Contract, dated April 15, 1992,
between the Company and Samuel A. Plum.(1)
10.9 -- Director Indemnification Contract, dated May 2, 1991,
between the Company and Andrea Gotti-Lega.(1)

52

10.10 -- Severance Contract, dated August 15, 1988, between the
Company and Thomas J. Finneran.(1)
10.11 -- Severance Contract, dated May 26, 1989, between the
Company and James Dulude.(1)
10.12 -- Severance Contract, dated December 1, 1988, between the
Company and Cynthia Gordan.(1)
10.13 -- Equipment Financing Lease Agreement, dated September 18,
1992, between QFR and United States Leasing
Corporation.(1)
10.14 -- Equipment Financing Lease Agreement, dated September 29,
1992, between QFR and KeyCorp Leasing pursuant to a Notice
of Assignment from U.S. Leasing.(1)
10.15 -- Equipment Financing Lease Agreement, dated February 16,
1989, between QFR and Key Financial Services, Inc.(1)
10.16 -- Equipment Financing Lease Agreement, dated September 22,
1992, between QFR and Dana Commercial Credit Corporation
(Fleet National Bank).(1)
10.17 -- Equipment Financing Lease Agreement, dated October 8,
1992, between QFR and Capital Associates International,
Inc.(1)
10.18 -- Equipment Financing Loan Agreement, dated August 31,
1992, between QFR and HCFS Business Equipment
Corporation.(1)
10.19 -- Equipment Financing Lease Agreement, dated September 13,
1991, between QFR and Sovran Leasing and Finance
Corp/NationsBanc Leasing Corp.(1)
10.20 -- Equipment Financing Lease Agreement, dated December 18,
1990, between QFR and IBM Credit Corporation.(1)
10.21 -- Equipment Financing Lease Agreement, dated May 5, 1993,
between QFR and The CIT Group.(1)
10.22 -- Equipment Financing Lease Agreement, dated June 30, 1993,
between QFR and AT&T Commercial Finance Corporation.(1)
10.23 -- Chicago, Illinois Showroom Lease, dated July 1, 1989,
between the Company and LaSalle National Bank, Trustee.(1)
10.24 -- Hickory, North Carolina Showroom Lease, dated June 15,
1993, between the Company and Hickory Furniture Mart,
Inc.(6)
10.25 -- High Point, North Carolina Showroom Lease, dated November
6, 1991, between the Company and Market Square Limited
Partnership.(1)
10.26 -- Los Angeles, California Showroom Lease, dated September
23, 1992, between the Company and The L.A. Mart.(1)
10.27 -- Tupelo, Mississippi Showroom Lease, dated December 14,
1992, between the Company and Mississippi Furniture
Market, Inc.(6)
10.28 -- Mexico City, Mexico Warehouse Lease, dated June 6, 1993,
between Quaker Fabric Mexico, S.A. de C.V. and Irene Font
Byrom.(1)
10.29 -- Licensing Agreement, dated May 17, 1990, between the
Company as Licensee and General Electric Company.(1)
10.30 -- Licensing Agreement, dated September 24, 1990, between
the Company as Licensee and Amoco Fabrics and Fibers
Company.(1)
10.31 -- Software Licensing Agreement, dated October 29, 1987,
between the Company as Licensee and System Software
Associates.(1)
10.32 -- Licensing Agreement, dated June 5, 1974, between the
Company and E.I. DuPont de Nemours & Company, Inc.(1)
10.33 -- Licensing Agreement, dated October 17, 1988, between the
Company as Licensee and Monsanto Company.(1)
10.34 -- Licensing Agreement, dated July 28, 1987, between the
Company as Licensee and Phillips Fibers Corporation.(1)
10.35 -- Software Licensing Agreement, dated July 7, 1988, between
the Company as Licensee and Software 2000, Inc.(1)
10.36 -- Licensing Agreement, dated February 1, 1977, between the
Company as Licensee and 3M.(1)
10.37 -- Software Licensing Agreement, dated April 8, 1992,
between the Company as Licensee and Premenos
Corporation.(1)

53

10.38 -- Software Licensing Agreement, dated March 19, 1993,
between the Company as Licensee and Sophis U.S.A., Inc.(1)
10.39 -- Quaker Fabric Corporation 1993 Stock Option Plan and Form
of Option Agreement thereunder.(1)
10.40 -- Option to Purchase Common Stock issued to Nortex
Holdings, Inc., effective April 13, 1993.(1)
10.41 -- Amendment No. 1, dated as of October 25, 1993, to
Shareholders Agreement, dated March 12, 1993, by and among
the Company, Nortex Holdings, Inc., MLGA Fund II, L.P.,
MLGAL Partners, W. Wallace McDowell, Jr., William Ughetta,
and Ira Starr.(1)]
10.42 -- Quaker Fabric Corporation Deferred Compensation Plan and
related Trust Agreement.(2)
10.43 -- Form of Split Dollar Agreement with Senior Officers.(2)
10.44 -- Credit Agreement, dated as of June 29, 1994, by and among
the Company, The First National Bank of Boston, and
Continental Bank, N.A.(3)
10.45 -- Equipment Schedule No. 5, dated as of September 14, 1994,
to Master Lease Agreement, dated as of May 5, 1993,
between QFR and the CIT Group/Equipment Financing, Inc.(4)
10.46 -- Commission and Sales Agreement, dated as of April 25,
1994, between QFR and Quaker Fabric Foreign Sales
Corporation.(4)
10.47 -- Stock Option Agreement, dated as of July 28, 1995,
between the Company and Eriberto R. Scocimara.(5)
10.48 -- Amended and Restated Credit Agreement, dated December 18,
1995, among the Company, QFR, Quaker Textile Corporation,
Quaker Fabric Mexico, S.A. de C.V., The First National
Bank of Boston, and Fleet National Bank.(5)
10.49 -- Note Purchase and Private Shelf Agreement, dated December
18, 1995, among the Company, Prudential Insurance Company
of America, and Pruco Life Insurance Company.(5)
10.50 -- Guarantee Agreement, dated as of December 18, 1995, among
the Company, The Prudential Insurance Company of America,
and Pruco Life Insurance Company.(5)
10.51 -- Amendment Agreement No. 1, dated as of March 21, 1996, to
that certain Amended and Restated Credit Agreement, dated
as of December 18, 1995, among the Company, QFR, Quaker
Textile Corporation, Quaker Fabric Mexico, S.A. de C.V.,
The First National Bank of Boston, and Fleet National
Bank.(5)
10.52 -- 1996 Stock Option Plan for Key Employees of QFR, dated
April 26, 1996.(6)
10.53 -- Amendment Agreement No. 2, dated as of October 21, 1996,
to that certain Amended and Restated Credit Agreement,
dated as of December 18, 1995, among the Company, QFR,
Quaker Textile Corporation, Quaker Fabric Mexico, S.A. de
C.V., The First National Bank of Boston, and Fleet
National Bank.(6)
10.54 -- Software License Agreement dated October 31, 1996 between
the Company and System Software Associates Inc.(6)
10.55 -- Medical Expense Reimbursement Plan.(6)
10.56 -- High Point, North Carolina Warehouse Lease, dated April
1, 1996 between QFR and C&M Investments of High Point,
Inc.(6)
10.57 -- Standard Industrial Lease Agreement, dated May 10, 1996,
between CIIF Associates II Limited Partnership and QFR.(6)
10.58 -- Rights Agreement dated March 4, 1997 between the Company
and The First National Bank of Boston relating to the
Company's Stockholder Rights Plan.(6)
10.59 -- 1997 Stock Option Plan.(6)
10.60 -- Amendment, dated as of February 24, 1997, to Employment
Agreement between the Company and Larry A. Liebenow.(6)
10.61 -- Amendment No. 4, dated as of December 19, 1997 to the
Amended and Restated Credit Agreement, dated as of
December 18, 1995, by and among QFR, Quaker Textile Corp.,
Quaker Fabric Mexico, S.A. de C.V., the Company,
BankBoston and Fleet National Bank.(7)
10.62 -- Employee Stock Purchase Plan, dated as of October 1,
1997.(7)
10.63 -- Note Purchase Agreement dated October 10, 1997 among QFR,
The Prudential Insurance Company of America, and Pruco
Life Insurance Company.(7)

54

10.64 -- Guaranty Agreement, dated as of October 10, 1997, by the
Company in favor of the Prudential Insurance Company of
America and PrucoLife Insurance Company.(7)
10.65 -- Commercial Lease between QFR and Clocktower Enterprises,
Inc., dated as of August 1, 1997.(7)
10.66 -- Lease between Robbins Manufacturing Co., Inc. and QFR,
dated as of October 22, 1997.(7)
10.67 -- Lease between Tilly Realty Associates and QFR, dated as
of December 9, 1997.(7)
10.68 -- Lease between 1 Lewiston Street, LLC and QFR, dated as of
March 16, 1998.(7)
10.69 -- Purchase and Sale Agreement, dated August 7, 1998,
between QFR and Rodney Realty Trust.(8)
10.70 -- Stock Option Agreement, dated as of October 19, 1998,
between the Company and Mark R. Hellwig.(8)
10.71 -- Lease between ADAP, Inc. and QFR, dated as of December
11, 1998.(8)
10.72 -- Purchase and Sale Agreement, dated January 6, 1999,
between QFR and Montaup Electric Company.(8)
10.73 -- Purchase and Sale Agreement, dated January 22, 1999,
between QFR and Jefferson Realty Partnership.(8)
10.74 -- Amendment No. 6, dated as of March 26, 1999 to the
Amended and Restated Credit Agreement, dated as of
December 18, 1995, by and among QFR, Quaker Textile Corp.,
Quaker Fabric Mexico, S.A. de C.V., the Company,
BankBoston and Fleet National Bank.(8)
10.75 -- Amendment No. 1, dated as of March 26, 1999 to the Note
Purchase Agreement dated as of October 10, 1997 among QFR,
The Prudential Insurance Company of America, and Pruco
Life Insurance Company.(8)
10.76 -- Purchase and Sale Agreement, dated May, 1999, between QFR
and The Center for Child Care and Development, Inc.(9)
10.77 -- Tax Increment Financing Agreement, dated May 27, 1999,
between the City of Fall River and QFR.(9)
10.78 -- Memorandum of Understanding, dated July 1, 1999, between
the City of Fall River and QFR.(9)
10.79 -- Lease between Frank B. Peters, Jr. and QFR, dated as of
June 15, 1999.(9)
10.80 -- Amendment No. 7, dated as of September 30, 1999 to the
Amended and Restated Credit Agreement, dated as of
December 18, 1995, by and among QFR, Quaker Textile Corp.,
Quaker Fabric Mexico, S.A. de C.V., the Company,
BankBoston and Fleet National Bank.(9)
10.81 -- Lease between Hamriyah Free Zone Authority and QFR, dated
as of November 28, 1999.(9)
10.82 -- Form of change in control agreement, dated December 17,
1999, between the Company and each of its vice
presidents.(9)
10.83 -- Agreement concerning change in control, dated December
17, 1999, between the Company and its controller.(9)
10.84 -- Amendment No. 1 to the Company's Deferred Compensation
Plan, dated December 17, 1999.(9)
10.85 -- Amendment No. 1 to the Split Dollar Insurance Agreements
between QFR and each of its officers.(9)
10.86 -- Amendment, dated as of December 17, 1999, to Employment
Agreement between the Company and Larry A. Liebenow.(9)
10.87 -- 1999 Stock Purchase Loan Program and form of related
Secured Promissory Note and Stock Pledge Agreement.(9)
10.88 -- Amendment No. 2, dated as of December 28, 1999 to the
Note Purchase Agreement dated as of October 10, 1997 among
QFR, The Prudential Insurance Company of America, and
Pruco Life Insurance Company.(9)
10.89 -- Software License Agreement, dated December 29, 1999,
between QFR as Licensee and Paragon Management Systems,
Inc.(9)
10.90 -- Mexico City, Mexico Warehouse Lease, dated February 6,
2000, between Quaker Fabric Mexico, S.A. de C.V. and Irene
Font Byrom.(10)

55

10.91 -- Amendment to the 1997 Stock Option Plan.(10)
10.92 -- Lease between Sayre A. Litchman and QFR, dated June 30,
2000.(10)
10.93 -- Software License Agreement dated April 30, 2001 between
QFR and SSA Global Technologies, Inc.(11)
10.94 -- Purchase and Sale Agreement, dated June 29, 2001, between
QFR and Whaling Mfg. Co., Inc.(11)
10.95 -- High Point, North Carolina Warehouse Lease Extension
Agreement, dated July 29, 2001, between QFR and Bresmiro
Associates, LLC.(11)
10.96 -- Purchase and Sale Agreement, dated September 4, 2001,
between QFR and Charles McAnsin Associates, LP.(11)
10.97 -- Los Angeles Warehouse First Amendment to Standard
Industrial Lease Agreement, dated September 24, 2001,
between QFR and CIIF Associates II, LP.(11)
10.98 -- Energy Supply Agreement, dated December 4, 2001, between
QFR and Select Energy, Inc.(11)
10.99 -- Second Amended and Restated Credit Agreement, dated
February 14, 2002, among QFR, Quaker Textile Corp., Quaker
Fabric Mexico, S.A. de C.V., the Company, and Fleet
National Bank.(11)
10.100 -- Note Purchase and Private Shelf Agreement, dated
February 14, 2002, between QFR and The Prudential
Insurance Company of America.(11)
10.101 -- Form of stock option agreement between the Company and
outside directors, prior to participation in the 1997
Stock Option Plan.(12)
10.102 -- Natural Gas Service Terms Agreement, dated May 20, 2002,
between QFR and AllEnergy Gas and Electric Marketing
Company, L.L.C.(12)
10.103 -- Form of extension of change in control agreement, dated
December 13, 2002, between the Company, each of its vice
presidents, and its controller.(12)
10.104 -- Form of indemnification agreement, dated December 13,
2002, between the Company and each of its directors and
officers.(12)
10.105 -- Software License Agreement dated December 31, 2002
between QFR and SPSS, Inc.(12)
10.106 -- Mexico City, Mexico Warehouse Lease, dated February 6,
2003, between Quaker Fabric Mexico, S.A. de C.V. and Irene
Font Byrom.(12)
10.107 -- Amendment No. 1 to Software License Agreement, dated
February 24, 2003, between QFR and Adexa, Inc.(12)
*10.108 -- Amended and Restated Employment Agreement, dated as of
March 17, 2004, between the Company and Larry A. Liebenow.
21 -- Subsidiaries.(5)
*23 -- Consent of PricewaterhouseCoopers LLP.
*31 -- Certificates of Chief Executive Officer and Chief
Financial Officer pursuant to Securities and Exchange Act
Rules 13a-14(a) and 15d-14(a) as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 dated
March 17, 2004.
*32 -- Certificate of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. section 1350 dated
March 17, 2004.

- ---------

(1) Incorporated by reference to the Company's Registration Statement on
Form S-1, Registration No. 33-69002, initially filed with the Securities
and Exchange Commission on September 17, 1993, as amended.

(2) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended January 1, 1994.

(3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended July 2, 1994.

(4) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994.
(footnotes continued on next page)

56

(footnotes continued from previous page)

(5) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 30, 1995.

(6) Incorporated by reference to the Company's Registration Statement on
Form S-1, Registration No. 333-21957, initially filed with the Securities
and Exchange Commission on February 25, 1997, as amended.

(7) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended January 3, 1998.

(8) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended January 2, 1999.

(9) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended January 1, 2000.

(10) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 30, 2000.

(11) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 29, 2001.

(12) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended January 4, 2003.

57

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 17, 2004.

QUAKER FABRIC CORPORATION

By: /s/ LARRY A. LIEBENOW
..................................
LARRY A. LIEBENOW
CHIEF EXECUTIVE OFFICER,
PRESIDENT, AND DIRECTOR

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

58

SCHEDULE II

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 29, 2001, JANUARY 4, 2003, AND JANUARY 3, 2004
(DOLLARS IN THOUSANDS)

REPORT OF INDEPENDENT AUDITORS ON
FINANCIAL STATEMENT SCHEDULE

To the Board of Directors of Quaker Fabric Corporation:

Our audits of the consolidated financial statements referred to in our report
dated February 19, 2004 appearing in the 2003 Annual Report on Form 10-K of
Quaker Fabric Corporation also included an audit of the financial statement
schedule listed in Item 14(a)(ii) of this Form 10-K. In our opinion, this
financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.

The financial statement schedule of the Company as of and for the year ended
December 29, 2001 was audited by other independent auditors who have ceased
operations. Those independent auditors stated in a report dated February 4,
2002, that the schedule presented fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.

/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 19, 2004

REPORT OF INDEPENDENT PUBLIC AUDITORS ON SUPPLEMENTAL
SCHEDULE TO THE CONSOLIDATED FINANCIAL STATEMENTS

THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
LLP AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP.

We have audited in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements included in this
Form 10-K, and have issued our report thereon dated February 4, 2002 (except
with respect to the matters discussed in Note 5, as to which the date is
February 14, 2002). Our audit was made for the purpose of forming an opinion on
those statements taken as a whole. The schedule listed in the index in
item 14(a) is the responsibility of the Company's management and is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states, in all material respects, the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.

/S/ ARTHUR ANDERSEN LLP

Boston, Massachusetts
February 4, 2002

GENERAL INFORMATION

DIRECTORS

SANGWOO AHN, Chairman
Founding Partner
Morgan Lewis Githens & Ahn

LARRY A. LIEBENOW
President and CEO
Quaker Fabric Corporation

DR. JERRY I. PORRAS,
Lane Professor of Organizational
Behavior and Change, Emeritus
Graduate School of Business -- Stanford University

ERIBERTO R. SCOCIMARA
President and Chief Executive Officer
Hungarian-American Enterprise Fund

COMMITTEES

AUDIT COMMITTEE
Sangwoo Ahn
Jerry I. Porras
Eriberto R. Scocimara
STOCK OPTION COMMITTEE
Sangwoo Ahn
Jerry I. Porras
Eriberto R. Scocimara

COMPENSATION COMMITTEE
Sangwoo Ahn
Jerry I. Porras
Eriberto R. Scocimara

NOMINATING AND CORPORATE GOVERNANCE COMMITTEE
Sangwoo Ahn
Jerry I. Porras
Eriberto R. Scocimara

OFFICERS

LARRY A. LIEBENOW
President and Chief
Executive Officer
MICHAEL E. COSTA
Controller

JAMES A. DULUDE
Vice President
Manufacturing

CYNTHIA L. GORDAN
Vice President, Secretary
and General Counsel

MARK R. HELLWIG
Vice President
Supply Chain Management

PAUL J. KELLY
Vice President -- Finance,
Treasurer and Chief Financial Officer

THOMAS H. MUZEKARI
Vice President
Sales

BEATRICE SPIRES
Vice President
Design and Merchandising

NORMAN J. STURDEVANT
Vice President and Chief
Information Officer

DUNCAN WHITEHEAD
Vice President
Research and Development

CORPORATE DATA

CORPORATE OFFICE
Quaker Fabric Corporation
941 Grinnell Street
Fall River, Massachusetts 02721
(508) 678-1951

ANNUAL MEETING
10:00 a.m., May 21, 2004
Quaker Fabric Corporation
1082 Davol Street
Fall River, Massachusetts 02720

TRANSFER AGENT AND REGISTRAR
Equiserve Trust Company, N.A.
P.O. Box 43010
Providence, RI 02940-3010
(781) 575-3120
http://www.equiserve.com

NASDAQ: QFAB
INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP
One International Place
Boston, Massachusetts 02110

LEGAL COUNSEL
Proskauer Rose LLP
1585 Broadway
New York, New York 10036

STATEMENT OF DIFFERENCES

The trademark symbol shall be expressed as..................................'TM'

The registered trademark symbol shall be expressed as........................'r'